Euro-Dollar Advance Seen in Pipeline as Charts Point Higher, Germany Eyes Resolution of Budget Row

-EUR/USD readying for break higher, says technical analyst.
-1.1926, 1.2014 key obstacles for rally to 200-month average. 
-Bullish charts and upbeat investors keep EUR aimed higher.
-As Germany's Heiko Maas looks for budget deal next month.

Above: Germany's Heiko Maas, file photograph. Image © Pound Sterling Live, Still Courtesy of buten un binnenmage

  • EUR/USD spot rate at time of writing: 1.1876
  • Bank transfer rate (indicative guide): 1.1444-1.1560
  • FX specialist providers (indicative guide): 1.1690-1.1770
  • More information on FX specialist rates here

The Euro-to-Dollar rate held onto earlier gains on Tuesday and was said by technical analysts at Commerzbank to be steadily poising itself for a break above nearby resistance and continuation of its summer rally just as Germany eyed a possible December resolution to a row over the EU's budget.

Europe's unified unit had backed off from the 1.19 handle but held above its opening level for the week amid a continued global rally for risks assets, as bullish signals emanate from the charts and expectations strengthen for a robust 2021 economic recovery. 

 "EUR/USD is sitting at the tope of its 3 month range. A close above 1.1926 should be enough to generate enough interest for a challenge of the 1.2014 recent high. This remains the break up point longer term to the 1.2622 200-month moving-average," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank. "We have a positive DMI and MACD and should see a break higher shortly." 

Jones says any declines in the Euro-to-Dollar rate should run out of steam at 1.1695, ahead of the 1.1612/02 level that is regarded as an "interim floor for the market." She and the Commerzbank team are buyers of the Euro from 1.1780 and are targeting a move up to 1.2010 ahead. 

Technical indicators pointed the Euro higher both before and after German Finance Minister Heiko Maas reportedly expressed confidence that a disagreement between the EU and eastern bloc members Poland and Hungary could be resolved by the end of December's European Council meeting.

Above: Euro-to-Dollar rate shown at hourly intervals alongside S&P 500 index futures (black line, left axis).

Maas was made the remarks during a panel discussion at the Berlin Policy Forum, according to Politico, and one week after the two East European members vetoed the EU's next seven-year budget out of objection to new terms and conditions about observance of the 'rule of law'. 

If the EU's budget fails to secure the unanimous endorsement of all members at next month's summit the bloc's eagerly-anticipated and much-vaunted coronavirus recovery fund will be delayed while the process of keeping some of Brussels' activities and policy programmes would be complicated. Concerns about the resulting outlook for government spending in Europe were credited last week with holding the Euro back from the 1.19 level and rendering it an underperformer for the period more generally. 

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"We think a solution to the impasse on the EU budget and recovery fund will eventually be found. However, as it stands there is no obvious solution and finding one could take time, in our view. This makes it likely that the EU budget is not agreed by year end, and that implementation of the recovery fund is delayed, although the economic impact of this is likely to be limited, in our view," says Benedicte Lowe, a cross asset strategist at BNP Paribas.

Euro gains may have been aided on Tuesday by a better-than-expected Ifo survey for November and an upgrade to third-quarter German GDP growth figures, with both coming as bullish signals emanate from the charts. Germany's Ifo index fell from 92.5 to 90.7 this month, stopping short of the 90.3 envisaged by consensus. Meanwhile, third quarter GDP was revised to 8.5%, up from the initial estimate of 8.2% and a positive surprise for the market. 

Above: Euro-to-Dollar rate shown at daily intervals alongside S&P 500 index futures (black line, left axis).

"We are fairly confident that the rest of the major economies will post very grim Q4 GDP data, but we are now less sure about Germany," says Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics. " The sharp drop in [Ifo] expectations is at odds with yesterday’s PMI data, which showed a significant jump in expectations, due to the prospect of a vaccine. Remember though that the IFO survey asks respondents about their expectations in six months, compared to 12 months in the PMI. In any case, we need to see the December data to get a clearer picture of how optimistic business leaders are after this month’s good news on the vaccine front."

Europe's recovery outlook has been buttressed in recent weeks by a double-dose of stimulative developments including the U.S. election outcome and progress in the race for a coronavirus vaccine.  Both these factors were top of mind for investors this week and on Tuesday, with President Donald Trump having instructed the General Services Administration to begin the process of transitioning to a new White House administration.

Markets were also heartened by the incoming Joe Biden's pick of former Federal Reserve chair Janet Yellen as his Treasury Secretary. Tuesday's gains followed a rally to open the week that was ignited by building expectations that the first of a series of coronavirus vaccines could be available within weeks, which could enable a further easing of restrictions on activity. 

"Headlines over the weekend focussed on when vaccines could be widely distributed," says Imogen Bachra, a rates strategist at Natwest Markets. "Attention now turns to how restrictions can be eased. Most lockdown 2.0 rules were in place for November. As the month comes to a close, and Covid trends have arguably improved at a faster pace than expected (in most regions), focus now shifts to how these restrictions will be eased in the coming weeks. This week, French and UK governments have announced that lockdown 2.0 will end as planned, and will be replaced by more moderate (regional) restrictions."   

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