EU Proposes Mutual Debt; Risk Soars – EURUSD Breakout?

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EU proposes compromise of 500B grants 250B loans
Futures a swing highs
Nikkei 0.70% Dax 1.59%
UST 10Y 0.697
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Risk soared today on news that the EU is considering a hybrid stimulus package of 500B euros in grants and 250B euro in loans that would be backed by joint issuance of the union.

The news sent stock index futures to session highs with S&P now trading well above the key 3000 level while Nasdaq touched the 9500 mark. The deal suggests a possible compromise with what is known as “frugal four” – the four small Northern European nations of Austria, Netherlands, Sweden and Denmark all of whom objected to the notion of pure grants.

More importantly, the deal suggests that European authorities are serious about the need for debt mutualization in the face of the historic economic shock caused by the COVID-19 pandemic.

The news pushed EURUSD through the key 1.1000 level and the pair could go higher if the market become more certain that the fiscal stimulus would go through. Although it is notoriously difficult to achieve consensus in the union, the European policymakers understand that the current situation is critical and will require debt mutualization and perhaps monetization by the ECB in order to jumpstart the region’s battered economy. Although the northern European nations will likely continue to resist the move towards pan-European issuance and more importantly the emphasis on grants, their economic power is tiny in comparison to Germany and France and even Italy and Spain – both of whom desperately need the funds to jumpstart their economies.

Therefore, unless the deal unwinds, today’s move is the first concrete positive piece of news for the EURUSD in a long time and now that the pair has taken out the 1.1000 figure it may be setting for further upside ahead.

Boris Schlossberg
Managing Director

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