EURUSD and EURGBP upside bias
The recent decline in the USD has been supporting the EURUSD. The EURUSD is sometimes known as the 'anti-euro' index due to the strong EUR component of the Dollar Index. As a result they have a strong negative correlation. When the Dollar Index falls the EURUSD rises and vice versa. However, the Bloomberg EUR index is up around 2.5% this month and around 8% since the February trough.
Why the EUR support?
Firstly the passing of the €750 billion European Recovery Fund has been taken by the market as a very positive sign on European solidarity. The 'frugal four' did not object to the fund in the end and as a result the chances of the eurozone breaking up are now reduced as the nations pull together to support the economy via the fund.
Secondly, yesterday german IFO data rose across all three subcomponents giving the euro more reasons to rally. This adds to the strong July PMI readings from last week,
Thirdly, one risk area for the EURUSD is that the US federal CARES Act has provided a huge support to the households impacted by joblessness, through extending unemployment insurance benefits by 13 weeks. It also has a large payment of an extra US$600 per week to all 31.8 million unemployed. However, the scheme ends in July so there is a need for more stimulus before month end, which may prove easier said than done to finalise. This fiscal cliff edge may further weaken the USD the longer it takes to finalise and support the EURUSD higher.
Options markets
There is a strong call option skew on heavy EURUSD options, so more EUR strength is anticipated by the market going forward. The majority of these 'bubbles' are 'call' (buy side) options.
EURGBP upside bias
The UK, on the other hand,is still struggling with Brexit negotiations. According to Gov't sources there has been neither 'breakdown or breakthrough' on major sticking points and talks are at an admitted impasse. EU is expected to warn that are only a few weeks left to arrange a Brexit deal that is legally operational by year end after the latest round of talks. The EU had pencilled in a summit of EU leaders for October 15 to approve any agreement, with the possibility to move it later in the month if needed. However, they warned that further delays would jeopardise the ratification process ahead of a vote in European Parliament in December.
As a result expect EURGBP buyers medium term as long as this situation remains the same.
