So, the four-day EU summit ended with the victory of the majority: although the "oppositionists" negotiated for more favorable conditions for themselves, they still could not change the situation radically. Let me remind you that the representatives of the Netherlands, Denmark and Austria insisted that the EU Economic Recovery Fund should consist only of loans and did not include irrevocable subsidies. They categorically rejected the 500/250 grant-to-loan ratio nor did they agree to the 400/350 formula with subsequent compensation. These complex negotiations were accompanied by verbal exchanges and even fist bumps on the table (French leader Emmanuel Macron did not restrain himself) – so the intrigue around the results of the July meeting continued until the last minute of the summit.
Nevertheless, the market reacted quite weak to the compromise reached. The euro/dollar pair, of course, renewed another four-month high, reaching 1.1468, but the expected attack on the 15th figure did not happen. The pair still remains at a busy height, but for the further development of the upward trend, buyers of EUR/USD need to at least break through the resistance level of 1.1505 (the upper line of the BB indicator on the weekly chart). Otherwise, an inevitable price pullback will follow to the base of the 14th figure and then to the nearest support level of 1.1360 (Tenkan-sen line on the same timeframe). In such situations, the currency pair cannot stay in a flat for a long time – either up or down. If the pendulum does not swing towards the North in the near future, traders, first, will fix profits, and secondly, will start opening short positions that will pull the price to the above-mentioned downward targets.
The weak reaction of the market to the results of the EU summit is primarily due to the fact that this decision was widely announced. Yesterday morning, Bloomberg journalists reported that the parties had previously agreed on a compromise: the total amount of gratuitous aid was reduced from 500 to 390 billion euros, and the amount of soft loans was increased to 360 billion instead of 250 billion. The optimistic comments of Angela Merkel and Spanish Prime Minister Pedro Sanchez, which were voiced on the eve of the fourth round of talks, increased the confidence that the parties will still find a common denominator. Of course, there was a certain risk of another failure – in this case, the European currency would have collapsed throughout the market, and the pair with the dollar was now trading at the base of the 12th figure. In turn, the positive result was too expected to provoke an upward impulse.
In addition, dollar bulls stepped up yesterday, reacting to loud statements from the White House about the preparation of a new trillion dollar aid package. Against the background of such news flow, the dollar index strengthened slightly, having a corresponding impact on the market.
But in my opinion, this fundamental factor should not be trusted. It will not be able to become a catalyst for the steady growth of the dollar in the near future. The fact is that talks about a new stimulus package have been circulating for several months. Back in late May, the US Secretary of the Treasury promised to present the corresponding bill "in the near future", the volume of which was to be from 1 to 2.5 trillion dollars. However, the political divisions that exist not only between Republicans and Democrats, but also within the Republican Party did not allow the White House to commit a "blitzkrieg". Yesterday, the Trump administration announced the continuation of work on a bill to mitigate the severe consequences of the pandemic on the economy. The amount announced by the White House (1 trillion) corresponds to the lower limit of market expectations. At the same time, the Senate and House of representatives have less than two weeks left before millions of US residents stop receiving increased unemployment benefits.
Here, it must be emphasized that in order to implement the bill, it must be approved both in the Lower House of Congress (which is controlled by the Democrats) and in the upper. And if the Senate is likely to support Trump's initiative, then the House of Representatives is unlikely to "blindly" pass the Republican bill. Democratic officials have already warned that their party is prepared to stop any Republican effort to pass a one-party bill. There are already some disagreements on the document, although it has not even gotten to the Congressman for consideration yet. In particular, the White House proposes to reduce the payroll tax, through which the national pension programs are financed. The President sees the reduction of this tax as an economic stimulus, while the Democrats believe that this step could harm the social security system, and this hindrance is far from the only one.
Thus, the EUR/USD pair retains its potential for growth. Longs can be opened from current positions, although I would recommend waiting for the breakout of the resistance level of 1.1510 for reliability. In this case, buyers will strengthen their positions, opening their way to the middle of the 15th figure.