Euro hits four-month high as hopes for EU recovery fund deal rise

LONDON (Reuters) – The euro hit a 19-week high of $1.1467 on Monday, underpinned by hopes the European Union would agree on a 750 billion euro ($857.93 billion) recovery fund to help revive EU economies hit by the COVID-19 pandemic, of which 390 billion euros could be offered as grants.

EU leaders have made progress in Brussels after three days of talks, but they remain at odds over the composition of the recovery fund. The fund’s backers initially proposed 500 billion euros of grants and 250 billion of loans. Some countries objected to that much in grants. They saw 350 billion euros as the maximum, but showed signs of compromising.

The next level to watch for the euro is $1.1495, which would take the currency to a year-and-a-half high. It was last up 0.2% at $1.1450 EUR=EBS.

Analysts said the smaller the amount of grants, the more the euro would fall.

Graphic: Euro jumps to four-month high – here

Jane Foley, senior currency strategist at Rabobank, said the fact the currency could not stabilise above $1.1460 suggested more was needed to push it higher.

“There is some good news already in the price. But it does look like it is struggling this morning to hold above that $1.1460 level … as there is a little bit of ‘selling the fact’,” Foley said.

“But I would argue that the fundamentals for the euro have improved since around about May,” she said. “We may still need another couple of positive headlines to take us to the next step.”

The EU summit was originally due to last two days. The fact that it is now continuing into a fourth day of negotiations is evidence that EU leaders are ready to do everything it takes to maintain unity in the euro zone, Foley said.

If they agree on a recovery fund, said Mike Bell, global market strategist at J.P. Morgan Asset Management, that would boost confidence in the euro regardless of the numbers in the deal.

“What has been established is ‘are the EU in times of need willing to pull together and display unity in order to help out the hardest-hit economies?’, and so the exact number is less relevant than getting a deal done,” Bell said.

BNP Paribas had two trades set in to express their positive view on the euro: long euro/dollar via options with a strike of $1.16, and a long euro/Swiss franc, said Parisha Saimbi, G10 FX strategist at BNP Paribas. “Within the next couple of weeks, seeing $1.16 wouldn’t be completely out of the woods.

“On a day like today perhaps we could test $1.15 if we do get a deal announced today … perhaps we can see an initial 30-, 40-, 50-pip pare back to take profit, but I think the trend should still be there for us to get up to $1.16,” she said.

“It’s still right to believe that the market hasn’t fully priced in a deal outcome,” Saimbi said, noting that according to BNP’s positioning index, money managers were long the euro, albeit still half-way before seeing positions becoming over-stretched.

Elsewhere, the U.S. dollar index USD= was flat at 95.83, with its advance kept in check by investors’ strong risk appetite amid expectations of more stimulus from Europe and from the United States.

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