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FX: EU harmony strikes right note for single currency

Analysts expect the European recovery fund to underpin a strengthening of the single currency against the dollar over the rest of this year and beyond.

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By the time European Union leaders announced on July 21 that they had agreed a €750 billion package to help member states recover from the impact of coronavirus, EUR/USD had risen to 1.1475 from 1.1176 just a month earlier.

Expectations of 1.15 on the day were stymied by the composition of the package, specifically that almost half its total value is in the form of loans rather than grants.

But the euro has continued to rise, with the market viewing the deal as evidence that the European Central Bank backstop is intact and that the risk of European break-up remains low.

According to Deutsche Bank strategist George Saravelos, the euro-higher trade over the coming months is all about whether or not European growth outperforms that of the US. With indicators such as restaurant visits suggesting that this divergence is accelerating, Deutsche remains bullish, targeting 1.20.


Jari Stehn,
Goldman Sachs

Jari Stehn, chief European economist at Goldman Sachs, describes the agreement on the recovery fund as an important political signal that further European integration is possible.

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