ANZ analysis for EUR/USD, citing cross currents - ongoing safe haven demand challenges reflationary pulses
- In the US, the rise in daily COVID-19 cases to the highest levels since April questions the stability of the unfolding recovery. The reproduction rate is greater than one in 31 states. Texas and Florida have delayed re-opening their economies further, re-introducing some restrictions.
- In Europe, leaders have failed to agree the quick implementation of the proposed EUR750bn Recovery Fund which crystallises Europe's emergency fiscal response rather than representing a new dawn for pooled public spending.
- Across the board, coincident recovery data have been strong, but inflation, unemployment and explosive public and private debt levels all raise questions about medium to longer term damage.
Investors' lack of a high conviction view for EUR/USD is therefore understandable.
- Over the summer, a 1.10-1.15 trading range, the site of 70% of price action in the past 24 months, may dominate.
- As autumn approaches, attention will turn to the US elections and US-EU/China trade relations. The speed of recovery in labour markets and inflation will also be topical.
- However, the elections and the policy constraints facing the next administration could justify some USD underperformance as the latter stages of the year approach.
