Trading for week 29 started on a positive note as the G10 currencies logged modest gains on Monday. Our subject currency EUR rallied a percent against the pound, 0.75% against Yen and Frank, and 0.40% against the dollar.
There hasn’t been a clear, single catalyst behind the increase in risk assets on Monday. We believe the dollar back foot was one of the reasons for the G10 outperformance. Investors continue to grapple with positive impacts of economies reopening, as well as the increased risk of a virus flare-up that goes with it.
The Golden Crossover is attracting more attention. Early July, it was EURUSD who spotted with a Golden Crossover bullish breakout pattern, followed by Silver (Commodities) last week, and it is S&P 500, which joined the Golden Crossover club on Monday. At the same time, S&P traced out a near-term top via a double top pattern overnight.
Nine EUR crosses are witnessing Golden Cross. Interestingly all these crosses have seen a significant up move in the first half of 2020, barring EURUSD. We Expect EURJPY and EURCHF could follow the EURUSD footsteps in 2H 2020.
What’s behind the EUR strength? The EUR has been advancing since Merkel joins with France in recommending a euro fund of 500 billion euro. The E.U. Summit on the proposed Recover Fund ended last Month. As widely expected, the summit was concluded without any genuine agreement. Now focus on July physical E.U. summit, which is due this Friday.
On 30 June 2020, the E.A. council adopted a recommendation on the gradual lifting of the temporary restrictions on non-essential travel into the E.U. The recovery pattern between E.A. and the U.S. lead us to the bullish EUR side, and the E.U. recovery fund aimed to support the common currency in the coming months.
Data preview: The massive calendar of event risks and data releases still on tap for this week could provide this push, but we think the onus is now on the EUR to rally on its own merits with the European Central Bank meeting (Thu) and the E.U. summit on the Recovery fund (Fri). These two events could raise the EUR volatility in the week ahead. Targets for our long EURCHF, long EURGBP, and long EURUSD trades were revised marginally upwards due to the new E.U. momentum.
- Paul Donovan at UBS said, “The Europeans are debating fiscal stimulus too, ahead of the E.U. summit on Friday. Finland has joined other countries in suggesting less stimulus and more political control over the stimulus. There was zero chance of any money being paid out any time soon, and national governments will be leading fiscal policy in the months ahead. But markets would prefer signals of unity and recognition of the scale of the crisis.”
- “Initial discussions by E.U. leaders on the recovery fund remained fraught with disagreement on the overall size and allocation of funds. Another physical E.U. summit on the 17-18 July should hopefully bring a more fruitful discussion on this important topic,” Danske Bank said in a note.
ECB preview: At this week’s ECB policy meeting, we expect there are no new initiatives. And also hope this week’s meeting is unlikely to trigger big currency moves.
- Economists at Nordea markets said, “ECB meeting (on 16 July) will not deliver another easing package like the one we saw in June. There is no need for one at the moment.”
- German factory orders grew 10% in May compared with April.
- In May 2020, when Member States began easing the COVID-19 containment measures, retail sales increased by 17.8% in the euro area, according to the official release.
- In May 2020, Italian Industrial Production increased by 42.1% compared with the previous month.
EURUSD settles with modest gains on Monday. Finally, the common currency managed to close above the 1.1300 marks led by a higher low and high pattern. Looking ahead to the 2H 2020, it’s shaping up to be just as eventful as the first potentially. Euro bulls will be keeping a close eye on the growth stories between the E.A. and the U.S.
We still believe the EUR could outperform against CHF, JPY, and USD compared to the other crosses.
The key support level for the EURUSD is placed at 1.1250, followed by 1.1180. If the price moves up, the key resistance levels to watch out are 1.1425 and 1.1500. A close above 1.1500 indicates a new wave higher towards 1.1700 and 1.2000.
It is important to always keep in mind the risks involved in trading with leveraged instruments.
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