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Euro Relies on Recovery Fund Agreement

Euro zones leaders need to make their recovery fund a reality in order to revive its battered currency in the forex market.

The euro’s comeback was threatened after Austria, Denmark, Sweden, and the Netherlands countered a joint proposal by France and Germany. It was for a 500 billion euro or $548 billion funds by suggesting aid in the form of loans.

Gaétan Peroux, a strategist at UBS Global Wealth Management, said the euro’s road to recovery will likely be bumpy. This is as markets assess the scope for the commission to come up with a plan acceptable to all member-states. 

Continuing signs of a global and European recovery should eventually raise the euro-dollar levels above 1.10 in forex.

The Recovery Fund proposals have several key elements that would, in theory, help Euro zones’ weakest economies. The European Commission would issue the debt, and money would be distributed through grants. Repayments would come via the EU budget.

Negotiations will begin formally and the European Commission will unveil its own proposal.

The lack of a region-wide fiscal framework has long been seen as a thorn in the ambitions of EU leaders. They aim to make the euro a stronger rival to the U.S. dollar in the FX market.

The EU currency weakened to its lowest level in three years in March, when Europe became the epicenter for COVID-19.  The bloc’s most indebted nations, including Italy and Spain, have suffered severe outbreaks.

That same month, the five-year Italian credit default swapped, a gauge of EU breakup risk, spiked to its highest point since 2013. This my have taken place due to worries of another sovereign debt crisis in the bloc. 

After the Franco-German proposal, that measure fell to the lowest level in over a month.

Euro’s Comeback Depends on a Final Agreement

Kit Juckes, a strategist at Societe General SA said this proposal isn’t a fix of any kind yet. For the moment, it’s just something to shake out euro shorts, against the yen as much as the dollar. They will go bumping along the bottom of the post-2014 range, he added.

Forex news reports that bearishness on the euro has been the strongest since 2018. This was according to Citigroup’s FX Pain Index for the currency, an indicator of active trader positions. Some analysts see it as a sign that a so-called short squeeze is looming.

A week of risk reversals on the euro-dollar pair eased since hitting their highest mark since March last week. It still shows a preference for the common currency and it rose as much as 0.7% to $1.0973.

Ned Rumpeltin, European foreign-exchange strategy head at Toronto-Dominion Bank said it is only one step and more will be required. If it’s able to get across the line with other EU members, it represents an important step forward, he added.

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