Eurozone Common Fund Proposal Buoys Euro US Dollar (EUR/USD) Exchange Rate
The Euro to US Dollar (EUR/USD) exchange rate extended its bullish run on Wednesday as markets greeted signs of a potential move towards a closer Eurozone fiscal union.
A Franco-German proposal of a common fund to support recovery from the Covid-19 crisis helped to push the Euro (EUR) higher across the board.
While it remains to be seen whether the proposal for a €500 billion fund will come to fruition the prospect of greater fiscal support still offered EUR exchange rates a solid boost.
Markets were naturally encouraged by hopes that political divisions within the currency union have eased, increasing the odds of a smoother recovery from the pandemic disruption.
Even so, the positive impact of the news could soon fade as doubts over the timeliness of the plan mount.
As Jordan Rochester, FX strategist at Nomura, noted:
‘As this could form a part of the 2021-2027 EU budget negotiations, it’s not clear that this stimulus will be coming anytime soon.
‘(The first quarter of) 2021 may be when the EU finally does get around the joint issuance and six to seven months is a long time for EU countries to wait in these COVID-19 times.’
Risk of Dovish Fed Meeting Minutes Weighs on US Dollar
Demand for the US Dollar (USD) proved generally limited in the face of a lingering sense of market risk appetite, meanwhile.
Growing anticipation ahead of the release of the latest set of Federal Open Market Committee (FOMC) meeting minutes also kept USD exchange rates on the back foot.
With investors wary of the potential for the minutes to demonstrate a more dovish outlook support for the US Dollar proved muted.
Signs that the central bank remains open to the prospect of further monetary loosening measures could see the EUR/USD exchange rate gaining fresh ground.
While Fed Chair Jerome Powell has previously ruled out the prospect of cutting interest rates into negative territory higher odds of additional policy easing could still weigh heavily on the US Dollar.
EUR Exchange Rate Upside Limited if Eurozone PMIs Disappoint
The Euro could fall out of favour once again on Thursday, though, on the back of May’s initial set of Eurozone manufacturing and services PMIs.
Confirmation that the Eurozone economy remained in a state of slowdown this month would limit the potential for further EUR exchange rate gains.
With Germany already in a state of recession another set of underwhelming PMIs would give investors little cause for confidence.
Even if the manufacturing and services PMIs show some improvement on the month, though, as long as both sectors remain in a state of slowdown the positive impact on the Euro is likely to prove limited.
Any further deterioration in the performance of either sector could weigh heavily on the EUR/USD exchange rate, meanwhile.