Euro surges on EU recovery fund plan

Optimism surrounding the European Union’s plan to prop up those economies in the bloc most severely impacted by the COVID-19 virus helped force the euro above the psychological 1.10 level versus the US dollar on Wednesday.

The EU laid out the costly rescue plan yesterday, which will see a mammoth 750 billion euros (500bn in grants and the rest in loans) distributed to those countries worst affected by the lockdowns, primarily Italy and Spain. While the proposal is yet to be signed off, and potentially not made available until January next year, investors have deemed it an encouraging sign of unity and a milestone for collective responsibility within the bloc that would undoubtedly aid in its recovery once the worst of the virus is over.

The news will be a welcome development for policymakers over at the European Central Bank, that have long called for governments to step up fiscal efforts to support the European economy. As for the ECB, dovish comments yesterday from President Lagarde and fellow members Lane and Schnabel make us more convinced than ever that the bank will increase its own stimulus measures (the PEPP) at its June policy meeting next week.

We think that the massive coordinated fiscal and monetary policy response from European authorities should ensure the Euro Area is well equipped to rebound better than most from the pandemic. This, we believe, is likely to be supportive of the euro in the coming months.

Trump hints at fresh China sanctions

This afternoon will see a slew of economic data out of the US. Weekly jobless claims data remains one of the most vital pieces of macroeconomic news on tap, so investors will be closely watching its release for signs that the rate of jobs lost is easing. Revised Q1 growth data could also prove a market mover, as could the latest durable goods order data for April - the first full month of lockdown.

Aside from that, news headlines about the ongoing US-China trade spat will remain at the forefront. President Trump has warned that he will be announcing ‘very interesting’ action against China this week, raising the possibility of fresh sanctions being imposed by the US on Chinese businesses. Should we see the announcement of significant new measures this week, we could see a reversal in the recent ‘risk on’ mode witnessed in the past week, causing investors to once again favour the dollar and sell higher risk emerging market currencies.

Investors will also continue to be watching the latest virus numbers and news on an easing in lockdowns across the globe.