EUR/USD jumps 40 pips as risk-on overshadows dovish ECB speak

• EUR/USD gains as Asian stocks print gains despite virus concerns. 
• Risk-on overshadows dovish comments by ECB’s Villeroy de Galhau. 
• Both equities and EUR/USD remain vulnerable to second wave of coronavirus. 
• US OIS curve inverts, suggests a need for additional fiscal or monetary stimulus. 

EUR/USD is better bid on Monday with gains in the Asian stock markets boding well for the common currency and high beta currencies like the Aussie dollar. 

Buoyant risk appetite

Stocks in the Asia Pacific are flashing green at press time, with the Shanghai Composite Index leading the way higher with over 4% gains. 

The bullish sentiment seems to have been bolstered by an impending bullish technical breakout on the Shanghai Composite and is weighing over haven currencies like the US dollar and the Japanese yen. 

The risk-on action looks confounding if read with the rising number of coronavirus cases across the globe. On Saturday, the World Health Organization (WHO) reported a record single-day rise of 200,000 in global coronavirus cases. 

The US, too, registered a record rise in cases, while Spain imposed lockdown in the north-western region of Galicia. 

Dovish ECB speak

European Central Bank’s Governing Council Member and Bank of France Head Francois Villeroy de Galhau said on Sunday that the coronavirus pandemic has permanently changed European economic policy and the non-conventional tools adopted by the central bank have now become quasi-conventional. 

Put simply, the ECB is unlikely to normalize policy any time soon. 

So far, the uptick in stocks has overshadowed Galhau’s dovish comments and helped the EUR stay bid. However, as noted earlier, the second wave of the coronavirus outbreak is gathering pace and could complicate the still-nascent global economic recovery. 

In addition, the US overnight index swap (OIS) curve recently inverted, sending an ominous signal across asset classes. The inversion represents a liquidity crunch and the need for more stimulus. As such, downside risks in both stocks and EUR/USD persist. 

At press time, the pair is trading at 1.1283, representing a more than 40-pip gain on the weekly opening rate of 1.1241. 

Apart from the broader market sentiment, the pair may take cues from the German Factory Orders s.a. (MoM) (May), scheduled for release at 06:00 GMT. The focus would also be on the Eurozone Sentix Investor Confidence and Retail Sales data. Across the pond, the US ISM Non-Manufacturing PMI for July will be released at 14:00 GMT. 

Technical levels