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  • Following subdued Tuesday trade, EUR/USD is consolidating above the 1.2100 as traders look ahead to key risk events later this week.
  • The EU Summit, an ECB meeting, Brexit discussions, US stimulus talks, and potential FDA approval of Pfizer’s vaccine lay ahead.

EUR/USD briefly slipped beneath the 1.2100 level in the early part of European trade, but quickly recouped losses and traded back above 1.2100 for the remainder of Tuesday’s session. Trade was subdued for the most part, with traders clearly biding their time/keeping their powder dry ahead of key risk events later in the week. On the day, EUR/USD closed Tuesday FX trade almost perfectly flat at 1.2101.

Super Thursday for EUR

Thursday will be a big day for the euro. Firstly, the ECB is set to deliver a significant easing package, which most expect will amount to a (roughly) EUR 500B top up to the Pandemic Emergency Purchase Programme, which will allow purchases to continue for many more months (rather than the ECB increasing the monthly rate of purchases). Meanwhile, the bank is expected to also extend its targeted longer-term refinancing operations (TLTROs), and perhaps make them more accommodative. The key here (as a few ECB governing council members have explained recently) is to extend the duration of accommodative financial conditions to further assist the recovery in 2021 and beyond, rather than making financial conditions right now more accommodative.

Amid the recent improvement in global financial market conditions since Joe Biden won the US Presidential election and positive vaccine news in early November (despite the worsening state of the global Covid-19 pandemic as the North Hemisphere enters winter), the pressure on the ECB to over-deliver on market expectations has been lessened. Indeed, many analysts now see the risk of under-delivery as being higher than the risk of over, meaning the risks to EUR might lay somewhat tilted to the upside. Moreover, while the ECB is likely to take issue with recent EUR appreciation vs USD, the trade-weighted EUR is not as strong (still below summer highs), so any attempts to jawbone EUR lower might be taken with a pinch of salt.

However, perhaps the more important event of the day for EUR will be the Summit of EU27 Leaders, which begins on Thursday and goes into Friday. Top of the agenda will of course be the issue of Brexit (can UK PM Boris Johnson and EU Commission President von der Leyen thrash out a deal when they meet on Wednesday in time for the summit?).

Elsewhere, the Polish/Hungarian veto against the EU Recovery Fund and 2021-2027 Budget will also be a hot topic. On Tuesday, a Polish government spokesperson said that Poland & Hungary are to “maintain their approach” to EU budgetary talks. However, Hungarian PM Orban later said that there is a good chance of a deal.

If a deal cannot be agreed with Hungary and Poland regarding the rule of law attachments being added to access to funding then EU officials have already threatened that they will go with “plan B”, which essentially could mean an EU-minus Poland and Hungary fiscal package. Poland and Hungary were set to be big net beneficiaries of the EU’s next-generation fiscal package, so time will tell if they cave into the pressure.

USD factors to note

It is also worth focusing on the factors that might affect the USD side of the EUR/USD equation, however, namely what happens over the coming days with US fiscal stimulus negotiations and whether the US FDA approves the Pfizer vaccine or not.

On the former; Congress is likely to pass a one-week stopgap bill that will avert a government shutdown at the end of the week and allow more time for Covid-19 aid negotiations to continue. On Covid-19 aid talks; the mood of negotiations has been a little more upbeat this week with the $900B bipartisan proposal having seemingly brought the Democrats and Republicans a little closer together. US House Speaker Nancy Pelosi was just on the wires saying that Covid-19 relief talks have made good progress, although she accused Senate Majority Leader Mitch McConnell of undermining discussions in a sign that both sides might still (unfortunately for those hoping for a stimulus bill to pass soon) be playing politics.

On the latter, the Pfizer CEO today said he expects the vaccine to gain FDA approval. If further progress is made in US stimulus discussions (hopes for which seemingly gave the US stock market a boost on Tuesday) and the Pfizer vaccine is approved for emergency use in the US, this might weigh on USD and support EUR/USD.