EUR/USD roars back as EU commission goes to war with “frugal four”

EUR/USD roars back as EU commission goes to war with “frugal four”
  • The EUR/USD pair rose after the EU commission unveiled the Next Generation EU proposals.
  • The commission is expected to raise more than $826 billion to help countries recover after the pandemic.
  • The proposal will find opposition with the "frugal four" countries that are opposing issuance of grants.

The EUR/USD pair rose by about 0.40% as investors reacted to the new funding request by the European Commission. The euro index, which measures the euro against a basket of currencies, rose by more than 0.50%.

EUR/USD rises

EUR/USD rises
EUR/USD rises after EU commission unveils recovery fund

European Commission unveils a recovery fund

The European Commission unveiled a $826 billion recovery fund – Next Generation EU – to help the economies navigate the ongoing coronavirus pandemic.

In a statement, Ursula von der Leyen, said that failure to raise the funds would leave the bloc torn along economic lines.

The region is facing the most challenging financial crisis since the 1930s. Earlier today, Christine Lagarde, the ECB president, said that the economy would shrink by between 5 per cent and 12 per cent.

According to the Financial Times, the commission is proposing a new set of taxes and levies to help pay back some of these funds. Such avenues include adding taxes to technology giants like Amazon and Google and adding more carbon taxes. The commission believes that it will raise at least €10 billion in the carbon market and between €5 billion and €14 billion in carbon taxes. Also, they expect to raise about €10 billion by adding more taxes to big companies.

In the statement, the commission said that the impacts of this funding will be felt acutely by people and businesses. It expects the unemployment rate to rise to about 9 per cent and inequalities to rise.

The Next Generation EU program will have three pillars. First, it will be to support member states for investment and reforms to address the current crisis. Second, it will be to kick-start the EU economy by providing incentives to private companies, and third, it will be about learning from the crisis.

You can read or download the entire Next Generation EU proposal here.

“Frugal Four” pose challenge to the proposals

The EUR/USD rose even though the new funding proposal faces significant challenges ahead. For example, the commission will need to convince the so-called “frugal four” on the approach.

In a statement earlier this week, the frugal four (Netherlands, Austria, Poland, and Denmark), said that they will reject any proposal that involves giving grants to member states. Instead, the countries are requesting that any funding to involve low-interest loans.

This approach has been rejected by southern states like Spain and Italy with the backing of Germany and France.

Therefore, analysts believe that the north and south rivalries will be the biggest challenge in passing the new proposal. They remember about how the rivalry led to the 2012 European debt crisis.

EUR/USD technical outlook

EUR/USD
EUR/USD technical forecast

The EUR/USD pair is trading at 1.1018, which is higher than Monday’s low of 1.0867. On the daily chart, the price rose to the highest level since April 1. It is also slightly below the 50% Fibonacci retracement level.  It is also slightly above the 50-day and 100-day exponential moving averages. Therefore, I expect bulls to remain in control as they aim for the next resistance at 1.1062. On the flip side, a move below 1.0960 will invalidate this prediction. This price is at the intersection of the 38.2% retracement and the 100-day EMA.

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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