Last week, the Euro pushed to the highest level seen against the US dollar since 2018 following the agreement between the EU 27 member states on how the Recovery Fund will operate. Leaders of 27 European Union countries reached a unanimous agreement on 750 billion euros ($860 billion) in coronavirus recovery funds, divided into grants worth 390 billion euros and low-interest loans worth 360 billion euros. It was the breakdown that took time to agree. It was vital that this was passed as the funds will be raised by the EU Commission using its AAA rating while there will be changes to EU rebates. The AAA rating means they will be able to borrow cheaper as a collective rather than individual countries; for example, Greece’s S&P rating is BB-, this is 9 notches lower than AAA. As a result, EURUSD has pushed circa 4.5% higher from the low of the month.

In the meantime, sterling benefited against the US dollar as a result of the move on EURUSD but subsequently moved lower against the single currency. GBPUSD is now trading at its highest level since March against the US dollar despite ongoing uncertainty about the progress in talks between the EU and the UK on their future relationship. Economic data also helped pushed the currency higher as retail sales, service and manufacturing data all improved.

The US dollar was on the back foot as concerns about deteriorating relations with China and that the US economic rebound is faltering prompted a sell-off on Wall Street on Thursday. This has raised the probability that the US Federal Reserve may need to do more to support economic growth.

Looking to the week ahead, the Fed policy meeting (Tue/Wed) will be closely monitored. At its last update in June, the US Central Bank left policy unchanged but Fed Chair Powell emphasised that they would take further action if necessary. Given the headwinds of worsening relations with China and the rise of COVID-19, the market is anticipating additional forward guidance.

Tuesday

  • Spanish Unemployment
  • US Consumer Confidence

Unemployment in Spain is expected to increase to the highest level since 2018 amidst the COVID-19 environment. In the meantime, the market will be keen to see what effect the increasing rate of COVID-19 in the US has had on consumer confidence.

Wednesday

  • US Pending Home Sales
  • US FOMC meeting

The Fed have stated several times that they would take further action if necessary. Today the Fed may feel the need to send a stronger signal. If so, the most likely move is that it hardens its forward guidance on the future path of policy. This was discussed extensively at the last two policy meetings, but policymakers failed to reach an agreement. Given the worsening relations with China and the rise of COVID-19, signposting to help the economy could be in the form of raising its weekly asset purchase target (most likely) to a cut in policy interest rates below zero (least likely).

Thursday

  • German Q2 GDP
  • US Q2 GDP
  • US Jobless claims

GDP data from the Germany and the US are likely to confirm what the market already knows- heavy contraction is expected. The US economy, as expected, posted a record decline in Q2 (a circa 33.5% annualised drop), reflecting the impact of much the economy being in lockdown right through April and for some of May. Germany is expected to post a decline of 9%, however, given the release of the EU Recovery Fund, market reaction maybe tepid. In the meantime, last week we saw the first increase in US jobless claims since March, the headline figure is expected to show another rise.

Friday

  • EU GDP Q2
  • US Personal Spending
  • UoM Consumer Confidence

The Eurozone Q2 GDP is expected to show a decline of 12.0% but given the release of the EU Recovery Fund, market reaction maybe limited. Finally, after a busy week from the US we conclude with two pieces of key economic data from the region. Both personal spending and consumer confidence are expected to soften from the recent improvements.

Read out Monthly FX Forecast for a longer term view of currency to movement.

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