Euro rallies 9 out of last 10 days, is 1.20 next?

Euro is single handedly the best performing currency right now. Its gone from 1.12 to 1.16 over the past month and today’s rally marks 9 out of 10 days of gains for EUR/USD. We’ve talked at length this week about why investors are falling hard for the euro. European Union leaders put their differences aside and came up with a very powerful stimulus package that not only sends a strong message to the market but will go a long way in cushioning an already recovering economy. The US government on the other hand is not only struggling to get control of the COVID-19 outbreak in the US but to agree on an effective stimulus package. Unfortunately unless extra unemployment benefits are extended the program will most likely lack the punch investors are hoping for. On this basis alone, euro is more attractive than the US dollar. 

At the same time, EUR/USD is lifted by the prospect of further improvements in Eurozone data and fresh weakness in the US.  That divergence could become more apparent tomorrow with Markit Economics releasing Eurozone and US PMIs. There’s no question that the Eurozone data will be better but we could see the first signs of a slower recovery in the US.  Many states paused or rolled back reopening and these measures will certainly curtail economic activity and restrain the recovery. The only question is when it shows up in the data.

The US is also engaged in an escalating trade war with China and even as pharmaceutical companies make progress on vaccine development, euro as a risk currency will rally on good news. For all of these reasons, unless there’s unambiguously negative euro news, the pair’s uptrend should remain intact. EUR/USD broke through 1.16 today. The next resistance level is right above 1.17 where there are some key Fibonacci levels but beyond that, EUR/USD could make a run for 1.20. 

Sterling also traded higher despite the EU’s top Brexit negotiator warning that a trade deal is unlikely this year.  Part of its strength could stem from Friday’s retail sales report which is expected to show a continued recovery in spending. USD/CAD dropped to a one month low as the loonie shrugged off lower oil prices. With Canadian data, today’s rally was surprising given the sell-off in the Australian and New Zealand dollars. 

AUD and NZD are lower in part because the Australian government forecasts a massive A$184.5 billion deficit this year, nearly $100B more than the fiscal year that ended last month. The Treasury expects the economy to contract by 2.5% over the next year with particular weakness for iron ore, the country’s largest export. This is bad news for Australia, especially with new lockdowns in Australia. They reported a continued increase in new cases and the largest amount of coronavirus deaths in 3 months, prompting the government to mandate masks in Melbourne. Trade data is due for release from New Zealand tonight and given the rise in manufacturing PMI, stronger numbers are expected.