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28.05.2020 11:33 AM
EUR/USD: The European Commission proposes a new aid package worth €750 billion. The response of the US to China's actions may collapse the markets.

The euro arose amid news that the European Commission has agreed to provide non-repayable loans to EU countries in need of assistance. The new package will allot € 500 billion for the so-called "grants", and another € 250 billion for credit lines.

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Yesterday, the European Commission proposed a new recovery plan, after the Franco-German agreement was stalled due to serious disagreements between the northern and southern European countries. The funds that will be allocated under the said program will help the unit emerge from the current economic downturn, as well as more easily deal the consequences of the coronavirus.

The new plan suggests the EU to raise € 750 billion debt directly to financial markets, with the budget at the amount of € 1.1 trillion. The repayment of borrowed funds will be through taxes or contributions, and will take place over decades from 2028.

The news was taken positively by traders, from which long positions in the euro were opened. However, overcoming the level of the 10th figure was still unsuccessful.

The approval of such a plan will require rather difficult and compromise decisions, primarily in the northern Europe countries, with which there is now the deepest disagreement. In addition, according to reports, approximately 40% of the fund will be used to save the economies of Italy and Spain, which leads to quite serious questions about the size of grants and loans. The same four countries, the Netherlands, Denmark, Austria and Sweden, which opposed the Franco-German agreement previously, also protested to such a plan. The approval of it threatens to escalate political risks within these countries, as the taxpayers will be the ones burdened to shoulder the debts.

Meanwhile, the situation around Hong Kong's autonomy is nearing its end. China clearly will not bend under the pressure of the White House, and will not back down from its national security program, in which Hong Kong represents the main problems. Yesterday, the representative of the PRC to the UN, Zhang Jun, stated that China categorically rejects the unreasonable request of the US to hold a meeting of the Security Council, since Hong Kong's national security legislation is exclusively an internal affair of China.

Last weekend, US Presidential Advisor Robert O'Brien said that the US could impose sanctions in response to China's national security bill, through which Beijing plans to "acquire" Hong Kong. The threat to Hong Kong's autonomy, which started in 1984, escalated after the session of the National People's Congress on Friday, to which NPC representatives claimed that such acquisition will not affect the rights and freedoms of the people residing in Hong Kong. The US did not agree to the claims, and Secretary of State Mike Pompeo said that any decision by the PRC that affects Hong Kong's autonomy and freedoms will lead Washington to revise relations with China. Anti-government protests and demonstrations have been held in Hong Kong, which were dispersed by police, and detained more than 180 people.

The Russian delegation to the UN supports Beijing's position that the situation around Hong Kong is an internal affair of China. US Secretary of State Mike Pompeo, on the other hand, told the Congress that Hong Kong already has no autonomy from China, and Beijing's current decision will only completely deprive the Hong Kong people of their independence.

Meanwhile, the macroeconomic reports published yesterday revealed that production activity in May increased due to the mitigation of strict quarantine restrictions, as well as the resumption of economic activity. According to the data published by the Richmond Fed, composite production recovered and totaled -27 points, up from the -40 points forecast of economists.

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The reports published yesterday by the Retail Economist and Goldman Sachs also revealed a slight increase in the sales of retail chains in the US, which added 0.6% in the index for the week of May 17 to May 23. However, compared with the same period in 2019, the index decreased by 17.1%.

Meanwhile, according to the report published by the Redbook, retail sales over the week of May 17 to 23 decreased by 5.5% compared to the same period in 2019, and in the first 3 weeks of May, fell only 1.5%.

The speech of Fed representative John Williams yesterday focused on the plans of the Fed for the future, in which the main goal is the recovery of the US economy to its pre-crisis levels. The recent actions of the Fed seems to be yielding results, so Williams emphasized once again that the Fed's monetary policy, as well as the government's fiscal policy, are very critical for recovery. However, despite the low interest rates, inflation will remain low for at least the next year. St. Louis Fed President James Bullard also sees the same prospects of quick recovery.

As for the technical picture of the EUR/USD pair, the resistance level 1.1030 is very important today, since a breakout of which will lead to a large upward movement of risky assets, possibly updating highs in the areas 1.1090 and 1.1140. However, if the demand for the euro declines, large levels of support will be seen in the areas 1.0960 and 1.0870.

Jakub Novak,
Analytical expert of InstaForex
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