MIFID II Rollback – A Possible Gamechanger for the EURUSD

on May 26, 2020
Updated: Dec 19, 2022

Europe continues to go through a lot of changes as the coronavirus pandemic still  impacts its regions. Countries in a poor fiscal shape were hit harder than others – the same North vs. South issue that consumed the Eurozone since the common currency was introduced. 

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The EURUSD in particular, was under tremendous pressure for a number of years. It dropped from 1.25 to below 1.07 on the back of the interest rate differential between the federal funds rate and the ECB main refinancing rate.

The Karlsruhe ruling put pressure on the pair, while the Franco-German initiative for common debt sharing sent the EURUSD back to the 1.10 level. But there is something else brewing in Europe, which may send the Euro pairs and the EURUSD in particular, much higher – MIFID II rollback.

Rolling Back MIFID II

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MIFID II was meant to regulate the financial industry services within the European Union.  Among other things, it regulates OTC (Over the Counter) trading, pushing it into official exchanges.

From a legislative point of view, it makes sense because exchanges are more transparent than OTC, so the aim was, among other things, to better control the financial flows. But it also hurt the banking sector profits.

A Bloomberg article revealed last week that lawmakers are weighing MIFID II rollback, with the idea having fervent supporters as BlackRock and Deutsche Bank. One of the main arguments in favor of the rollback is that MIFID II created an administrative burden for intermediaries, making it increasingly difficult for retail clients to access financial markets.

Should MIFID II rollback begin, the EURUSD’s fair value model,which is  based on the hedge costs and relative bank-stock performance, suggests values closer to 1.25. These are only flows pouring into the Euro due to low hedge costs. On top of that, the troubled European banking system will get a much needed helping hand as central banks pump liquidity into the system in unprecedented ways.

When it comes to financial markets, first there is a rumor, and then a “wait-and-see” approach to note the market’s reaction. If what we have seen in mid-May was just the rumor intended to prepare market participants of what’s to come, the EURUSD coiling may end abruptly.

Coupled with the common EU debt possibility, the widespread regulatory rollback is a positive for the EURUSD. It may be just the reason the pair needs to break the months-long consolidation between 1.10-1.07.