FX Update: Euro still shaky after weak EU Council meeting

The EU Council claimed to agree on significant measures in yesterday’s meeting, but no specific size for the package was agreed, with the group asking the EU commission to establish something on the order of a EUR 1 trillion recovery fund that would be worked into the EU’s 7-year multiannual financial framework, or MFF, budget. Clear differences on the source of funding remained, with EU Commission president Ursula von der Leyen claiming there could be a mix of grants and loans, while Germany’s Merkel spoke against grants, but did admit that its contributions to the EU budget would have to rise significantly. The EU council will meet again soon, possibly on May 6. The trouble here is the lack of agreement in principle on grants versus loans, the tardy start date of June 1 and the kicking of the issue over to the EU commission.

Shortly put, the meeting offered absolutely no answers to the longer term existential questions for Europe. For now, the market reaction is a slow bleed lower in the euro after a modest sell-off late yesterday and a modest if notable widening of Italian debt spreads rather than a more forceful rout. Italy’s leader Conte went home declaring the meeting a success, but this looks a rather political move to shore up his own government’s political fortunes. And let’s be honest – what is Italy’s choice in the near term here? It is in the teeth of the Covid19 crisis and has likely not drawn up any serious plans for how it would deal with an exit from the EU or launch of an alternative currency and can fund significant fiscal stimulus in the short term with the reasonable assumption that the ECB is going to pick up the tab with PEPP purchases anyway. Still, headline risk remains across southern Europe. The next EU council meeting is tentatively set for May 6.

Critically, one indicator showing signs of more growing strain in the EU financial system is the 3-month Euribor rate spiking as high as -19 basis points from its lows not far above the official EU policy rate of -50 bps, which suggest funding stress, and as an FT article called it, a sign of the “fragmentation of the region’s money markets.”

Another 4.4 million jobless claims were filed last week in the US, and the weekly continuing claims number rose to almost 16 million, or about 10% of the US labor force. We will likely see the US unemployment rate push close to or north of 20% for the April data cycle. We can’t emphasize enough the risks to the pace of the recovery from what is the most profound unemployment crisis in US history.

Chart: EURUSD weekly
Zooming out to the weekly view for EURUSD, we note that the local 1.0800 area break looks a bit less relevant than the cycle low of 1.0636 (lowest weekly close was 1.0688) and will focus on the sub-1.0350 cycle lows from early 2017, but if existential strains continue to ratchet higher from here in the EU, parity becomes the obvious psychological focus will quickly shift to parity.