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What's Next for EUR Amid Lockdowns, Dovish ECB, Stalled Stimulus Talks...



It's been a choppy week for EURUSD, with the pair ranging between the high and low 1.1800s as the pair was buffeted by risk on vs risk off flows; USD weakness at the start of the week allowed the pair to get off to a good start. However, as focus returned to the short-term implications of the Covid-19 pandemic around the middle of the week, the pair fell from highs, only to then be boosted again on a resurgence of US fiscal stimulus hopes last night.


As is the case across asset classes, EUR/USD is caught in the midst of a battle between vaccine and 2021 growth recovery hopes (bullish) versus short-term virus and lockdown risks (bearish). As the pandemic remains with us over the coming months prior to when mass vaccinations can be kicked off, this battle may continue.


However, there are also other factors to consider for EUR…


1) ECB – The European Central Bank have been preparing markets for a big package of easing in December, which is likely to include more QE (via the PEPP) as well as more favourable TLTROs. There are also some outside bets on another rate cut. If the ECB exceeds market expectations and delivers a rate cut, while continuing to “jawbone” EURUSD lower when it get to levels they see as too high, this could hamper any future EURUSD.



2) Lockdowns – No one knows how long Europe will stay in the national level lockdowns that most of the continent has recently returned to. French officials have vaguely signalled that we are still some time away. In the UK, it seems unlikely lockdowns will end prior to Christmas, directly so that they can be eased for Christmas. The extent to which this will hurt the European economy is not yet know… thus, next week’s Eurozone PMI data is VERY important, as it gives us an early insight into how badly the Eurozone economy is suffering amid the recently imposed lockdowns.


3) EU Recovery Fund and Budget Deadlock – As expected, Poland and Hungary vetoed the EU RF and Budget, given their opposition to “rule of law” attachments to the spending package that essentially state that if countries breach certain qualities of judiciary independence and press freedoms (or lack of), they will have their access to fund stripped. Hopes are that a deal can be made between the rest of the EU and Hungary and Poland prior to the next meeting of EU leaders on the 10th of December. The lack of progress has already meant that fiscal aid will not make it countries as soon as hoped, and further delay will cause further economic pain on the continent. EUR has been largely unfazed thus far, but if the deadlock drags into December, EUR may start to suffer.


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