The EURUSD pair is one of the pairs that reacted the most to the EU Recovery Fund deal signed yesterday. Typically a currency pair active Thursday’s and Friday’s, it advanced several big figures in the last few days prior to the EU deal.
While the EU Recovery Instrument is a historic step towards further integration, the outcome is nothing short of a mixed bag. It took a pandemic for Europe to come together, but even so, it compromised on important steps.
More precisely, the deal altered the initial proposal by changing the structure of grants and loans. At the “frugal states”’ will, grants shrank, and loans increased. The general public and the discussions focused on how the money will be split, but the biggest disappointment comes from the cut in the MFF (Multiannual Financial Framework).
It means that the Brexit gap, in the end, will be compensated through cuts in expenditure, not through additional revenue. Considering the coronavirus pandemic and the challenges ahead, it is unlikely for any EU member to have cuts in expenditure in the near future.
Moreover, programs related to science, innovation, or technology were cut to the minimum. It completely changes the initial structure of the Next Generation Europe as presented by the European Commission in March. Instead of a new, bold program, Europe is left with old programs that remained intact.
A compromise, indeed, was struck. You cannot please everyone, it seems, but the extent of the program fails to meet its original idea. The ball is now in the European Parliament’s court.
EURUSD Technical Outlook
The EURUSD pair just met important dynamic resistance on the weekly timeframe. No one trades on such a big timeframe, but the descending trendline started from the 2008 financial crisis represents a tough obstacle ahead.
After Macron’s election in the spring of 2017, the EURUSD pair rose dramatically from 1.06 to 1.25. The enthusiasm that a pro-European French President will push Europe further fueled optimism.
As the Fed raised the funds rate and the ECB did not, the interest rate differential sent the EURUSD pair lower from 1.25 to 1.06 again. And then the pandemic started.
Much of the EURUSD rally since March was caused by the bold Next Generation EU plan. As the original plan was altered significantly by yesterday’s deal, and with the EURUSD at major dynamic resistance, bulls have something to worry about.
From a swing trading perspective, selling the EURUSD above 1.15 with 1.18 stop loss and targeting amove back below 1.06 makes sense for a risk-reward ratio of 1:3.