- EUR/USD has gradually eased back towards daily highs in the 1.2150s in recent trade and currently trades close to 1.2140.
- The pair was given the “greenlight” by the ECB for further appreciation on Thursday.
- Focus now returns to other themes, such as US fiscal stimulus negotiations.
EUR/USD continues to trade with decent gains as US cash equity trading hours draw to a close; the pair reached as high as the upper 1.2150s in wake of the US cash open, then pulled back to US session lows around 1.2110, but has since recovered back towards highs of the day to trade around 1.2140. This means that the currency still trades well above pre-ECB rate decision levels around 1.2090 and with on the day gains of around 60 pips or 0.5%.
News that the EU was able to come to a deal with Poland and Hungary to remove their veto against the Recovery Fund and 2021-2027 Budget did not affect EUR sentiment much, and EU fiscal plans will now move to EU member state parliaments for ratification. Aid from the Recovery Fund will now be made available from H2 2021 (more than a year and three months after the pandemic first went global!).
ECB greenlights further EUR appreciation
The ECB held interest rates as expected and recalibrated a number of its stimulus programmes on Thursday, extending the duration of the PEPP by maintain the pace of monthly purchases but adding an additional EUR 500B to the programme’s total size. Net purchases will now last until March 2022. Meanwhile, the bank’s funding-for-lending scheme (TLTROs) will be extended by 12 months to June 2022. These adjustments were very much in line with market expectations.
Seemingly of more interest to FX markets was whether or not the ECB would strengthen its jawboning of the EUR. Well, the EUR bears were disappointed, as the ECB did not employ any strengthened language in opposition to EUR strength. Rather, the ECB reiterated that euro appreciation contributes to subdued price pressures and that the bank will continue to monitor developments in the exchange rate with regards to its possible implications for the medium-term inflation outlook. In the press conference, ECB President Christine Lagarde offered little more. Traders seemed at the time to take this as something of a “green light” for EUR/USD to appreciate further, hence the positive reaction to the statement.
Other factors to consider
Though the ECB rate decision seems to have been the defining moment for EUR/USD on the day, a few other fundamental factors are worth a mention.
Firstly, the US data largely went under the radar, but it is worth noting a significant deterioration in the US labour market over in the week ending 5 December according to the latest US weekly jobless claims. Initial jobless claims data showed 853K Americans signing up for unemployment insurance benefits, significantly above expectations for 725K. The recent rise in Covid-19 cases in the country, as well as the accompanying increasingly strict economic restrictions is having its affect, and could well push weekly initial claims back above 1mln by the end of winter, consistent with the US economy falling back into recession.
There is some debate over whether the poor near-term outlook for the US economy is going to be a positive for USD (safe-haven bid?) or negative (given the typical relationship between a country’s economic strength and the strength of its currency). Alternatively, some analysts argue that FX markets are already, and have been for some time, looking ahead to 2021 and beyond, where the outlook seems to be much more clearly USD negative, given expectations for a strong rebound in global economic growth.
Elsewhere, news on the state of US fiscal stimulus negotiations has been mixed and not seemed to broadly affect either FX or equity markets much on Thursday. In terms of the latest; while US House Speaker Pelosi said bipartisan talks are making “great progress”, Politico reported that Republicans had thrown cold water all over the bipartisan proposal. Indeed, US Senate Majority Leader Mitch McConnell said that he doesn’t see a path forward on the two main sticking points (which, for reference, are aid to states and cities and liability protections). McConnell wants a narrow deal that avoids those topics, but the Democrats have already rejected that idea. Moreover, Senate Republican whip John Thune commented that he doubted that the bipartisan group would be able to reach a deal on the issue of liability protection and predicted that the issue will be “punted to next year”.
In simpler terms, things are still stuck and the closer the end of the year comes without any agreement, the more this might weigh on risk appetite (particularly US equities), which could give USD some respite.
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