EUR/USD targets 1.1500 as investors downplay recovery fund deadlock

The EUR/USD pair jumped by more than 0.30% as traders reacted to the deadlock in Brussels. The pair is trading at 1.1458, which is its highest level since March 9 this year.

EU recovery fund talks hit deadlock

On Friday, the European Council started the first face-to-face meeting in Brussels. The main agenda of the meeting was to deliberate on the €750 billion recovery fund that was suggested by the European Commission in May.

In its plan, the commission said that it would raise these funds in the bond market and distribute it in for of grants to EU member states. The goal was to help these countries recover, without putting them in more debt. Among the biggest recipients of the funds would be Italy, Spain, France, and Germany.

To pay for the funds, the commission suggested several measures, including implementing higher taxes on technology giants and key polluters.

Unfortunately, a group of countries – Austria, Sweden, Netherlands, and Denmark – announced their opposition to the fund. They argued that the fund was too big and that providing grants would be the wrong idea.

In the weekend meeting, the side softened its stance. The members proposed scaling down grants to countries from the previous €450 billion to €350 billion. They also suggested that countries be given low-interest rates worth about €350 billion. As such, their package would be €50 billion less than what the European Commission had proposed. Finland agreed on this.

Analysts react to the discord in Brussels

At the same time, more issues emerged. For example, some members proposed cutting budget funding for members judged to be moving back from democratic norms. These include Hungary and Poland.

In a report, analysts at Danske Bank said that they expect a deal to be reached in the coming months. They wrote:

“Instead, investors’ focus will be on the share of grants to be included eventually in the agreement. The EUR is unchanged versus most major currencies this morning. If an agreement is not reached this week, we would still expect it to be reached before the European Commission starts its holiday in August.”

In another note, analysts at ING said:

“All in all, the notion that EU members are getting closer to an agreement is consolidating among investors this morning, and we see room for more optimism to build in the next few hours. EUR/USD has risen above 1.1450 and a break above 1.1500 appears to be on the cards if a compromise is found today.”

The EUR/USD technical outlook

The EUR/USD pair rose to an intraday high of 1.1468. On the four-hour chart, it is above the 50-day and 100-day exponential moving averages. It is also above the previous high of 1.1420, which is the highest level on June 10. Further, the pair is in an upward trend, as evidenced by the green trend line. Therefore, I expect that the pair will continue rising as bulls aim for the next resistance at 1.1500.