EUR/USD hits 21-mth high on summit success

The euro continues to make inroads against the US dollar. EUR/USD gained 1.1% last week and has added another 1.4% so far this week. Earlier on Wednesday, the euro tested the 1.16 level for the first time since October 2018.

EU recovery fund agreement boosts Euro

This week’s euro rally is directly connected to the EU Summit, as European leaders managed to thrash out an agreement after a grueling 4-day meeting. It was the second-longest ever EU summit, reflecting just how difficult it proved to hammer out the details of the EU recovery fund. Under the agreement, the EUR 750 billion recovery fund will be allocated as EU 390 billion in funds and EUR360 in low-interest loans. This represented a compromise between the wealthier members, such as the Netherlands and Denmark, who wanted most of the funds distributed as loans, versus the poorer members, such as Italy and Portugal, who wanted the funds as grants. In addition to the recovery fund, the EU agreed on a seven-year, EUR 1.07 trillion budget.

Investors and traders may feel confident that the euro has more room to climb based on the recovery fund agreement, but a note of caution is in order. First, there is always the chance of a correction after a strong rally, and the euro is up 3.4% since late June. Second, this agreement was forced upon the wealthier EU members, which are not particularly fond of large handouts to their poorer colleagues in the EU. The deep divisions between the rich and poor countries (north-south divide) have been papered-over for now, but still remain. Third, the deal leaves the EU economy, which is struggling, with a massive debt which will have to be paid back. These factors could temper enthusiasm for the euro.

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EUR/USD Technical

EUR/USD showed limited movement in the Asian session and moved higher in European trade. The pair is steady early in North American trade

• 1.1612 is the next resistance line, followed by 1.1684
• 1.1450 is providing support. Below, there is support at 1.1378

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