EUR/USD falls amid a barrage of bad news from Europe

EUR/USD falls amid a barrage of bad news from Europe

  • The EUR/USD pair declined after Eurogroup ministers failed to reach a deal on coronavirus financing
  • German and France central banks warned that the two countries will slide into a recession in Q2.
  • Yesterday, the ECB warned that European banks struggled before the coronavirus pandemic

The euro index inched downwards slightly after European finance ministers failed to reach an agreement on coronavirus financing. The index, which measures the euro against a basket of currencies declined by 0.15%. The EUR/USD pair declined by 17 basis points while the EUR/GBP dropped by 0.40%.

Euro index fell after Eurogroup ministers failed to reach a deal

Euro index fell

European ministers disagree on financing

The European Union has been among the worst-affected regions by the coronavirus crisis. Countries like Italy and Spain have been the most affected. The two have lost more than 31k thousand people, and the number is rising. Worse, the two countries were facing an economic crisis before the current pandemic started.

The meeting of EU members ministers, which started yesterday ended without an agreement. The meeting was called to deliberate on how to fund the crisis. Three options have been presented on how to deal with the crisis. First, some members want to deploy the $500 billion European Stability Mechanism (ESM).

Second, there is the option of using the European Investment Bank to issue guarantee funds. Finally, there is the option of setting up a $100 billion employment reinsurance fund.

According to sources, the main disagreement was between northern and southern members of the eurozone. Northern countries like the Netherlands have refused to commit to common debt issuance that has been advocated by southern states like Spain and Italy.

The latter countries also requested that the rules under the ESM be changed. It argues that the finding from ESM should not have conditions. Northern states disagree that this is necessary. The current disagreement brings memories of the divisions that led to the European debt crisis almost a decade ago.

A ray of hope is that the members will reconvene tomorrow and try to find a middle ground.

Europe set for a recession

These deliberations are happening at a time when the European Union is gearing for a recession. In a report, the Bank of France said that it expected the economy to shrink by 6% in the first quarter. The bank said that every week of lockdown is shrinking the economy by about 1.5%.

This will be the country’s worse performance on record. In fact, data released last week showed that the country’s services and manufacturing PMI dropped to their lowest level on record. The country’s unemployment rate is expected to rise to more than 10%.

The same bad outlook is happening in Germany. In a statement, Bundesbank said that the economy would shrink by 9.8% in the second quarter. This will be the worse performance on record. It will also be double of what happened during the last financial crisis. In their report, they predicted that the economy would shrink by 4.2% this year and then rebound by 5.8% in 2021.

Other European countries like Italy and Spain will have sharper declines because of their nationwide lockdown policies.

Worse, the banking sector in Europe is not all that strong. Most of the region’s biggest banks like Deutsche Bank, BNP Paribas, and Societe Generale have been struggling partly because of low-interest rates. In a report yesterday, the ECB said that return on equity at all banks it supervises declined from 6.2% to 5.2% before the crisis. Most of the worst-performing banks were from Germany followed by those from Italy.

EUR/USD outlook

EUR/USD outlook

The EUR/USD declined slightly today after the disappointing news from Europe. This could change in the next few hours since the Federal Reserve is expected to release the minutes of the last meeting. More so, the market will receive the outcome of the Eurogroup meeting tomorrow. This could lead to some volatility, which will likely see the pair exit the symmetrical triangle shown above.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Investing.com. Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.

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