EUR/USD: EU summit extended by 1 day as EU leaders settle neither budget nor recovery fund

4-hour time frame

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For the whole week, EUR/USD was trading higher. The single European currency was advancing before the ECB policy meeting, after the meeting, and in the run-up to the EU summit. The summit is devoted to the two crucial questions. The first one is the long-term EU budget worth over €1 trillion for 2021 – 2027. The second item on the agenda is the €750-billion recovery fund aimed at reviving the EU economy after the pandemic-driven crisis. The underlying reason behind the euro's advance is optimistic expectations for the EU summit. Nevertheless, today is Sunday but the summit which kicked off on Friday is still underway. Obviously, the policymakers have not reached any compromise decision yet for two days. So, they are assembling again on Sunday. On the other hand, it is too early to say that the talks have failed. The stumbling block is the opposite stance of the 4 EU countries: Austria, the Netherlands, Sweden, and Denmark. They are against the idea backed by Germany and France that nearly €500 billion out of €750-billion fund will be allocated as grants among the worst-stricken countries. In other words, they will not be required any repayment. In essence, the countries which are suffering less damage from the pandemic and the related crisis are invited to pool the mutual fund to back those economies which have been disabled by COVID-19.

The question is delicate, so the Frugal Four countries give well-grounded reasons. The Northern countries are famous for their practical approach. They tackled the crisis more efficiently because they strictly controlled their public spending and did not waste budget money. Still, they have to solve the crisis in other countries at their own expense. President of the European Council Charles Michel tried to find a compromise decision and suggested that €450 billion should be provided as grants instead of €500 billion. Nevertheless, the Northern countries did not welcome his proposal. Besides, Charles Michel offered a discount on the EU budget fees for Germany, Denmark, Sweden, and the Netherlands. Thus, these countries will be able to save something in the future. According to some media, this proposal relieved tensions at the summit, but did not solve the disagreement.

It was only the Dutch delegates who cheered the lower amount for grants from the total €750 billion. They called this proposal "the step in the right direction". At the same time, Dutch Prime Minister also thinks that any financial aid for national projects should be approved by all EU leaders. Any country should have the right to veto funds for a particular project. Another thing is that the Dutch Prime Minister insists that all financial aid should be provided on condition of implementing reforms. For example, the funds could be allocated for environmental projects. When it comes to bailout credits, we mean reforms. "If then, loans have to be converted to a certain extent into grants, then the reforms are even more crucial, as well as the absolute guarantee that they have taken place," Mark Rutte stated.

Austria's Chancellor Sebastian Kurz also believes that the proportion between the amount of grants and loans should be different. Lately Finland joined the Frugal Four as an opponent of the EU-backed proposal. It goes without saying that Italy and Spain advocate this idea and insist on the soonest provision of grants. These two countries think it does not make sense to report such spending and conduct reforms in exchange.

To sum up, optimistic expectations have not come true. So, the euro could come under pressure on Monday, especially if the summit ends with a zero success. Judging by the first two days, the odds are that no decisions will be made. Such prospects are certainly bearish for the euro. I've already said that the euro has been growing in the recent months entirely amid events in the US. In other words, the negative fundamentals in the US are to blame for the US dollar's weakness. The euro is taking advantage of this. In fact, the whole eurozone's economy will be stuck in the doldrums without the rescue fund. Italy, Spain, Greece, and Portugal will bear the most strain of the crisis. Under the worst-case scenario, these countries could default on their debt. They will certainly face a GDP slump and retard their economic development for a few years. The problems could resurface not only in the economy. Italy could bring up the issue of leaving the EU in the nearest years if it does not see any reasons to stay in the EU. If Italy receives no financial aid, it will be discouraged to sustain its membership.

The final trading day this week ended without macroeconomic events. The EU reported a CPI for June which came out at 0.3% on a yearly basis. The index was neglected by market participants. In the US, investors got to know only a consumer sentiment index from the University of Michigan which was worse than expected. Earlier, I told you about an "unimportant" ECB policy meeting which took place on Thursday.

Thus, at the end of the week, we're seeing an accelerated uptrend of EUR/USD which could come to an end on Monday unless the EU leaders reach any consensus. At the same time, the lack of consensus will not worsen the economic background in the EU. So, nothing will change in principle. Therefore, the euro could extend its climb next week. In this context, I would advise you to be ready for a possible trend reversal on Monday – Tuesday. Please, don't try guessing. That's the best you can do. Make sure you follow technical indicators and their signals.

From the technical viewpoint, EUR/USD tested the previous local high of 1.1422 and closely approached the local high of 1.1496 recorded before the previous high. Thus, technical analysis signals that the uptrend could be terminated if the pair fails to surpass the level of 1.1496.

Trading tips

On the 4-hour chart, EUR/USD retains the prospects of the muted uptrend. At the end of the last week, the currency pair corrected towards the critical kijun sen line, but failed to sustain at the level below. Meanwhile, it would be a good idea to go long on rallies with target levels of 1.1452 and 1.1494. Short positions should be considered not until the price consolidates below the kijun sen line. Then, you could trade by small lots with the first target level of 1.1308.

The material has been provided by InstaForex Company - www.instaforex.com