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Euro hits 4-month high as hopes rise for EU recovery fund deal
THE euro hit a 19-week high of US$1.1467 on Monday, underpinned by hopes the European Union would agree on a 750 billion euro (S$1.19 trillion) recovery fund to help revive EU economies hit by the Covid-19 pandemic, of which 390 billion euros could be offered as grants.
EU leaders have made progress in Brussels after three days of talks, but they remain at odds over the composition of the recovery fund. The fund's backers initially proposed 500 billion euros of grants and 250 billion of loans. Some countries objected to that much in grants. They saw 350 billion euros as the maximum, but showed signs of compromising.
The next level to watch for the euro is US$1.1495, which would take the currency to a year-and-a-half high. It was last up 0.2 per cent at US$1.1450.
Analysts said that the smaller the amount of grants, the more the euro would fall.
Jane Foley, senior currency strategist at Rabobank, said the fact the currency could not stabilise above US$1.1460 suggested more was needed to push it higher. "There is some good news already in the price. But it does look like it is struggling this morning to hold above that US$1.1460 level ... as there is a little bit of 'selling the fact'. But I would argue that the fundamentals for the euro have improved since around about May," she said. "We may still need another couple of positive headlines to take us to the next step."
The EU summit was originally due to last two days. The fact that it is now continuing into a fourth day of negotiations is evidence that EU leaders are ready to do everything it takes to maintain unity in the eurozone, Ms Foley said.
If they agree on a recovery fund, said Mike Bell, global market strategist at JP Morgan Asset Management, that would boost confidence in the euro regardless of the numbers in the deal. "What has been established is 'are the EU in times of need willing to pull together and display unity in order to help out the hardest-hit economies?', and so the exact number is less relevant than getting a deal done," he said.
BNP Paribas had two trades set in to express their positive view on the euro: long euro/dollar via options with a strike of US$1.16, and a long euro/Swiss franc, said Parisha Saimbi, G10 FX strategist at BNP Paribas.
"Within the next couple of weeks, seeing US$1.16 wouldn't be completely out of the woods. It's still right to believe that the market hasn't fully priced in a deal outcome," Ms Saimbi said, noting that according to BNP's positioning index, money managers were long the euro, albeit still half-way before seeing positions becoming over-stretched. REUTERS