• We still see room for EUR to move higher
  • The beginning of the board-based recovery
  • July is the key month to the EUR

Positive note: The new week began on a positive note with the common currency rallied by 0.70% against the dollar and Yen whereas, it dropped 0.80% each against the antipodeans AUD and NZD. 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. G10 currencies rebounded on Monday against the dollar along with the Global equity markets.

G10: The risk-on mood helped the antipodeans to rally more than 1.50% each against the dollar and the EUR surged by 0.75%. Flipside, the dollar paused the three-day rally and settled down across the board.

Things were shaped better on Monday mid-Asia session after China kept the benchmark lending rate unchanged.

Commodities cheered with Gold up by 0.7%, Copper by 1.5%, and Brent rallied by 3.0%.

Recovery: The Conference Board Leading Economic Index (LEI) for the U.S. increased 2.8 percent in May, following a 6.1 percent decline in April, and a 7.5 percent decline in March, according to the official report. Whereas for the Euro Area, the LEI decreased by 1.5% in May 2020. This reading suggests a post-pandemic recovery in E.A. is still in the early stages. Nevertheless, we expect it will catch up with the U.S. as France and Germany’s deal has been offering substantial optimism across the E.A.

E.U. Summit on the proposed Recover Fund ended last week. As widely expected, the summit was ended without any genuine agreement.

France and Germany’s 500 billion-euro fund and the ECB substantially lifting the size of pandemic Q.E. are the critical drivers to euro currency since May. We count this a mega bullish factor in the coming months. Overnight Euro risk assets were positive and discounted the fact that the European policymakers failed to reach the recovery fund’s agreement. We expect the deal will seal in July as the policymakers meet again. So, July is the critical month for the EUR. We forecasted a target of 1.17 in the medium term, and we are confident about Europe’s recovery.

Talking about the proposed E.U. recovery fund Reza Moghadam, chief economic adviser to Morgan Stanley, said, “I think July is a key date. Why? Because Germany takes up the presidency of the E.U. at the beginning of July. It is also Mrs. Merkel’s final presidency in the E.U. So, there is a lot of symbolism attached to that. There is a meeting scheduled specifically on this issue among all the E.U. 27 leaders on July 6th and 7th. Now, the proposals will only be implemented next year, and the disbursements go over 2-3 years. So, I think that it is a perfect chance that it will be done in July. If not, I think September will be a critical time.”

  • ING cited, “The gradual, but not great, reopening.” Economists at ING noted that “The post-pandemic recovery response has been robust, but we think there will be more. The gradual reopening of the economy provides hope, but with social distancing norms here to stay and inflation still not going anywhere, a subdued recovery is all we expect”.

 Data review: Economic sentiment in Germany increased for the third consecutive time. There is growing confidence that the economy will bottom out by summer 2020, according to the official data. Last week’s data points from the Euro Area pointed to gradual improvement. Some G10 economies appear to be rebounding faster than in other countries.

  • In June 2020, the ZEW Indicator of Economic Sentiment for Germany is 63.4 points, which corresponds to a rise of 12.4 points compared with the May result. We expect PMIs will show uptick activity in the manufacturing and service sectors.

  • The E.A. annual inflation rate was 0.1% down from 0.3% in April.

 Data preview: It is PMI week with France, Germany, EZ, and the U.S.

  •  ING: The May readings, while better than in April, were still well below the key 50 level, signaling contraction in both manufacturing and services. 
  • Westpac: Eurozone as a whole, is also experiencing the beginning of a broad-based recovery.
  • Danske Bank: In the U.S., we expect the indices to rise to around 50 (or perhaps slightly higher) and similarly in the euro area.

TECHNICAL OVERVIEW

EUR resumed its northward March, rallied 0.70% against the dollar. The common currency closed 80 pips higher at 1.1260 but faced resistance at 14MA. The trend is supportive, but the price needs to take out the recent higher at 1.1500 to confirm the trend once again.

The heavy calendar of data releases remains on top for this week could provide the push, but we think the dollar weakness cast this week’s EUR trend. A buy-the-dip strategy is giving better risk-reward in the medium term.

 

Medium-term: As we approach the halfway point of the year, the top returning EUR cross has been EURGBP surge nearly 6.00%, followed by EURCAD with 4.50% and EURNZD by 3.50%. Whereas EURAUD and EURUSD up only 1.50%. Flipside EURCHF dropped almost 2.00% and EURJPY by 0.60%. We are confident that the EUR could outperform against CHF and the USD in the second half of 2020.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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