The European currency is in an optimistic mood before the EU summit, scheduled for Friday, July 17. It took the chance to beat its competitor in the EUR/USD pair, that is, the dollar, and is reaping the fruits of its labors. However, the US currency, having lost some of its achievements and tired of the struggle, still remains a strong rival.
In the middle of this week, the dollar declined in relation to all currencies of the Big Ten (G 10), with the exception of the Swiss franc. This trend continued on Thursday, July 16. In the morning, the EUR/USD pair was trading in the range of 1.3999 - 1.1402, breaking through the current resistance of the market. Afterwards, the pair tried to leave these limits, rising to more acceptable levels. However, the pair is still far from Wednesday's values, when the Euro soared to the level of 1.1450. During the trading session, the Eurocurrency reached a 4-month high, but its growth was interrupted due to profit-taking by investors before the most important events: the ECB meeting and the EU summit. As a result, the EUR/USD pair slid to the level of 1.1400 again and still runs in this range by Thursday.
Market's optimism regarding the European currency is caused by confidence in the possible coordination of the European Commission anti-crisis plan at the upcoming summit. It can be recalled that a project to help countries most affected by the consequences of the COVID-19 involves € 750 billion in cash infusion. The confidence in a compromise is reinforced by a new financial assistance option proposed by Charles Michel, President of the European Council. The new approach is to preserve both the EU financial reserves (about € 1.074 trillion) and the amount of funds needed to restore the European economy (€ 750 billion). It should also be noted that this volume includes grants and loans, the ratio of which should remain unchanged. During the economic recovery, those countries that contribute more to the general budget of the European Union than they receive (Germany, Austria, Sweden, Denmark and the Netherlands) will be refunded part of the contributions.
According to analysts, a positive decision on financial assistance will provide additional support for the euro, which is on the wave of optimism. Another step towards its growth was the position of the ECB, which denies the possibility of further reduction in rates. The regulator intends to gradually curtail the volume of liquidity poured into the markets, which positively affects the dynamics of the euro.
On the other hand, the reduction in cash infusion is good news for the European currency and negative for the US currency. Analysts have repeatedly drawn attention to the excessive buildup of money supply from the US Federal Reserve. Of course, this was required to save the American economy, but the main thing was to stop on time, which turned out to be difficult for the monetary authorities. According to preliminary estimates, the US Treasury has accumulated over $ 1.6 trillion, which the White House administration will try to use on the eve of the presidential election. However, experts warn that the implementation of such a scenario could trigger a "flood" of dollar liquidity and become a catalyst for further problems for the dollar.
Meanwhile, the US currency, weakened by the struggle with the negative consequences of COVID-19 and the general decline of the national economy, has to overcome market resistance. The current dollar subsidence is caused by increased risk appetites, although the USD has become less dependent on this factor in recent years. Economists consider the high probability of a more significant expansion of the Fed balance sheet as the main reason for the weakening of the indicated currency. At the same time, budget spending in America can be unlimited in comparison with other countries. The drivers of the expansion of the balance can be both election expenses and the costs of leveling the consequences of the COVID-19 pandemic, in the fight against which the United States is desperately losing.
According to experts, the dollar retains the potential for further growth, despite a noticeable subsidence across the entire spectrum of the market. It's too early to draw the dollar as an outsider, and the euro as a leader, although the potential of the euro is strong enough to conquer the next price peaks. In relation to this, experts sum up that the euro will be "on the horse" in the short-term, pushing the dollar, but it may lose to it in the long term.
