The euro is rallying because Europe is perceived to be handling the pandemic better than the US. However, the recent stellar euro rally seems to be just as much due to the broad USD bear trend due to EUR optimism. The exchange rate is a relative function, as always with currencies. If the rally was purely driven by positivity toward the euro, then EURCHF – the primary currency pair for pricing EU existential risks - would have also risen notably. But, this pair has barely moved on the huge news about Next Generation EU. Thus, it’s early to call the recent EUR moves the start of a new broad and sustainable uptrend. That could happen, sure, but more will be needed than just one agreement on a COVID-19 recovery fund.

 

Add to that the fact that long EUR positioning is reaching extended levels, and the chances for a downside correction are getting realistic. It’s also important to keep in mind that COVID-19 cases are rising in Europe again too, only the pace is slower compared to the US or other hard-hit countries. On the whole, the world is still far from declaring victory over the virus, and that includes Europe as well.
 
The Next Generation EU Recovery Fund is a much-needed step in the right direction for the Eurozone, but investors will need more evidence that the economic rebound is on track before the euro can unleash a longer-lasting uptrend. For the moment, consolidation is more likely, especially at these levers of major resistance (see EURUSD technical analysis below).

For the week ahead, the EUR calendar is light with no major market-moving events or reports scheduled. The following two weeks are similar, and this further supports the case for EUR consolidation during the upcoming 3-4 week period, before we can reassess the situation again.