21.05.202013:12 Forex Analysis & Reviews: EUR / USD: Franco-German Recovery Fund and US-China trade war

Despite a fall in mid-March from $ 1.14 to $ 1.07, the euro has risen in price against the US dollar by almost 1.5% over the past three months.

The EUR / USD pair started this week around 1.08 and is currently trading at 1.0970.

According to The Goldman Sachs, the euro rose this week after France and Germany proposed the formation of a fund to help the EU countries which are most affected by the coronavirus pandemic, which was a significant positive surprise for the single European currency.

However, the implementation of the Franco-German plan is still far from certain, and there are many questions that encourage investors to be wary of such news.

The joint initiative of Paris and Berlin involves the distribution of grant aid, not loans, and should be unanimously approved by the 27 EU member states, as well as the European Parliament.

"The key questions arising from the proposal by France and Germany relate to when the funding program will begin, during what period the EU countries will be" fed "by the funds and how much new money they will ultimately raise," said Jordan Rochester, strategist at Nomura.

Rochester added, "Since this may become part of negotiations on the EU budget for 2021–2027, this stimulus is unlikely to appear in the near future. You may have to wait until the first quarter of 2021 when the EU finally decides on a joint issue of bonds, and for the countries of the alliance for 6-7 months - a long waiting time in the face of the fight against COVID-19, "

"Clarity on this issue will appear after the plan is presented by the European Commission next week. If the proposed funds, which make up about 3.5% of the EU's GDP, are provided within just one year, this will be a significant contribution. However, if the amounts are distributed during the seven-year budget of the EU, this may be a limited contribution of one year to GDP," the expert believes.

Although someone had a proposal from Germany and France about € 500 billion to help the eurozone countries affected by the pandemic, it might have caused a desire to buy euros, but for a stable rally, EUR / USD requires the efforts of both parties. Traders should have a firm belief that the time has come to sell greenbacks. Neither the expansion of the Fed's balance sheet, nor the increase in the US public debt, nor the country's huge foreign trade deficit discourages investors from wanting to keep the American currency in their portfolios.

Despite the constant decline in the share of US GDP in the global indicator, the share of the dollar in global payment and trade operations has not changed much. In addition, central banks still hold about 60% of their foreign exchange reserves in USD. Apparently, one of the main reasons for the primacy of the greenback is the lack of alternatives. Neither the single European currency nor the Chinese yuan is able to compete with the dollar. Its dominant role in the global financial system, apparently, explains the fact that investors are still oriented to the Fed. Obviously, much depends on the decisions of the American regulator, and not only in the United States.

The minutes from the April FOMC meeting somewhat cooled the ardor of EUR / USD buyers. Last month, the Central Bank seriously discussed the possibility of using Japan's experience in targeting the yield curve of government bonds. The strategy involves keeping debt rates at a certain level. At the same time, the Bank of Japan does not need as many resources as were expected when launching quantitative easing (QE). The balance of the Fed will not grow rapidly, and this is good news for the greenback.

Support for the EUR / USD bears is provided by increased tension in relations between Washington and Beijing.

On Wednesday, the US Senate passed a bill that could deprive some Chinese companies of listing opportunities on US exchanges if the latter do not follow US auditing standards and rules.

This measure, put forward by Republican John F. Kennedy and Democrat Chris Van Hollen, was unanimously approved. However, for entry into force, it must be approved by the House of Representatives and signed by US President Donald Trump.

Meanwhile, Trump continues to pour accusations against China saying, "They could easily hold back the pandemic, but they didn't do it,". Trump also accused China of a large-scale disinformation campaign designed to undermine his chances of re-election. This negatively affects the mood of the markets, puts pressure on stock indices, and strengthens the protective dollar. However, while the main currency pair holds above 1.09, the bulls do not abandon their intentions to resume attacks.