EUR/USD sparks higher as economist predicts €1 trillion boost to QE

EUR/USD sparks higher as economist predicts €1 trillion boost to QE
  • The EUR/USD is up today on a series of positive news from Europe.
  • Economists are predicting that the ECB will boost QE by about one trillion euros.
  • Tensions between the ECB and Germany are being ironed while Germany and France are discussing recovery funding
  • The US dollar is generally weaker as the number of coronavirus cases in the US surge

The EUR/USD pair is up by more than 0.55% as traders react to some positive developments in Europe and the overall weaker US dollar. The pair is trading at 1.1277, which is the highest it has been since June 24.

EUR/USD gains as ECB expected to boost QE

ECB could boost QE by about $1 trillion

Two weeks ago, the European Central Bank (ECB) surprised the market when it added €600 billion to its original Pandemic Emergency Purchase Program (PEPP). This action brought the total amount of the transaction to more than €1.35 trillion.

Now, some analysts are expecting the bank to add more than €1 trillion to this program in the next two to three years. In a recent note, Florian Hence, the chief economist at Berenberg said that the current authorisation was not enough considering the state of the eurozone economy. She also argued that inflation would take years to get to the ECB’s target of 2.0%. She said:

“Linking the PEPP increase to the inflation downgrade is a clear sign that the ECB has shifted its focus from short-term crisis management towards supporting the economic recovery over the medium term.”

The report came a day after the highest court in Germany said Bundesbank had the authority to determine whether it will participate in these purchases. The decision came a month after the country’s constitutional court sent shivers after saying that the ECB had overstepped its mandate. This decision means that the ECB can continue with its purchases without fear in Germany.

Meanwhile, the EUR/USD pair is also gaining because of a meeting between Emmanuel Macron and Angela Merkel. The two leaders are meeting in Berlin to discuss measures to fast-track the $840 billion recovery fund. This meeting comes a day before Merkel takes leadership of the 26-member bloc.

US dollar index slides as coronavirus cases jump

The EUR/USD is also falling because of the overall weakness of the US dollar. The US dollar index (DXY), which measures the strength of the greenback against key currencies, is down by 0.20%. It has declined against all currencies in the index.

The weakness comes at a time when coronavirus cases in the United States are rising. Health officials reported more than 43,000 new infections yesterday, which is the highest gain on record. And analysts expect that the number of cases will continue to rise. In a statement yesterday, Alex Azar, Health and Human Services secretary said:

“Things are very different from two months ago… So it is a very different situation, but this is a very, very serious situation and the window is closing for us to take action and get this under control.”

The worry for the greenback is that the rising cases will lead to more actions by the Fed. This will be in addition to the vast actions the Fed has already done.

On a positive note, pending home sales in the US rose by a record 44.3% according to the National Association of Realtors. That was the highest number on record.

EUR/USD technical analysis

EUR/USD technical analysis

The EUR/USD pair is trading at 1.1277, which is closer to the highest level since Thursday. On the daily chart, the price is above the 50-day and 100-day exponential moving averages. Also, it is forming a triangle pattern – bullish pennant – which is shown in black. This means that the price is likely to break out in the upside. If this happens, the level to watch will be the previous high at 1.1420.

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 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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