10.04.202011:58 EUR / USD: finest hour of euro or temporary weakness of dollar?

Long-term review

Exchange Rates 10.04.2020 analysis

The EUR / USD pair rose to 1.0950 due to the fact that EU finance ministers have finally agreed on a new package of financial assistance to the economy.

They approved a package of anti-crisis measures worth € 540 billion to help the EU economy recover from the coronavirus pandemic.

According to Mario Centeno, chairman of the Eurogroup, € 100 billion will be allocated to the SURE program approved last week (which aims to support employment in EU), € 200 billion for the European Investment Bank (EIB) business lending program, and the remaining € 240 billion for the back up funds of the Eurozone.

Meanwhile, the minutes of the ECB's meeting last March showed that some of its members expressed doubts about the launch of new bond purchases. Instead of expanding QE, they proposed launching OMT, a program developed in 2012 for direct financing of stressed eurozone countries with a credit line with ESM. This split decision of the ECB members helped in pushing the euro upwards.

However, the main reason why EUR / USD rose was the statement of Fed Chairman Jerome Powell. According to him, the regulator decided to allocate $ 2.3 trillion to support local governments and small and medium-sized businesses.

Exchange Rates 10.04.2020 analysis

"The Fed will continue to use all the tools at its disposal until the US economy begins to fully recover from the damage caused by the coronavirus outbreak," said J. Powell.

Against this background, the USD index, which measures the strength of the US dollar against other major currencies, dropped to the weekly low of 99.50 points.

In March, the central banks of G7, led by the Fed, bought bonds worth $ 1.4 trillion. It is assumed that such enormous flows of dollar liquidity will affect the USD exchange rate negatively in the future, and increase the Fed's balance sheet to $ 9-12 trillion by the end of the year. It is also expected to expand the US state budget deficit to $ 3.6 trillion this year, and expand it to up to $ 2.4 trillion in the next. In addition, according to JP Morgan, the US economy may be hit harder by the coronavirus pandemic than other countries. Thus, the dollar may be vulnerable in 2021.

At the moment, the dollar remains stable, even though the Fed has lowered interest rates to almost zero, resumed quantitative easing, and increased dollar liquidity to combat the deficit in the markets.

Performed by Viktor Isakov,
Analytical expert
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