VP Bank : Strong euro, weak dollar

In our magazine 'Telescope', we have already sketched out in detail what is at issue here; namely, there are five reasons for USD weakness over the longer term. For the short term, though, we maintained our prediction of a sideways tendency in EUR/USD. The yet to be contained corona pandemic, plus the greenback's reputation as a safe haven, effectively prevented a more pronounced decline in the US currency for quite some time. However, the greenback now looks vulnerable in the short term as well. Its safe haven function could cede centre stage to homemade uncertainties in the US. At the same time, there are pivotal decisions in the making on the European continent that could alter the way the eurozone member states interact, a development that would obviously argue for a stronger EUR. Thus the winds of change are picking up. So for the next three to six months, we now expect to see the euro gain ground against USD and ultimately trade in a range between 1.15 and 1.20.

1. Eurozone member states circle the wagons

After tough negotiations, the eurozone member states have agreed on a coronavirus recovery fund. The resolution reached at the marathon Brussels summit provides for the EU to take on debt in its own name. The total fund package of EUR 750 bn is to be divided into EUR 390 billion in outright grants, which will flow primarily to the debt-ridden countries of the bloc, and EUR 360 billion in repayable loans. This remarkable step by the summit participants was preceded by a paradigm shift on the part of the German government. Until now, Germany has resolutely objected to any kind of shared debt. So it appears that a new perspective is at the root of German Chancellor Angela Merkel's change of heart. Perhaps her thinking is: Some countries have suffered a structural disadvantage as a result of their membership in the eurozone, and that needs to be corrected through compensatory payments. This is good news for the 27-nation common currency zone in the medium term, as it makes a break-up of the bloc less likely, at least for now. Moreover, the members have demonstrated their ability to actually take action after a heated defence of their respective interests. Th currency markets like this type of cohesiveness in an otherwise polarised world, and the euro has already perked-up against the US dollar. However, we would also point out (critically) that the coronavirus recovery fund could also be the first step towards the so-called 'communitarisation' of eurozone debt and hence the risk of free-riding on the part of certain states. In other words, if money simply flows out of a common pot, the urgency for structural reforms, especially in Italy, could be conveniently forgotten there - something that would then weaken the competitiveness of the union as a whole at some point down the road. However, these are long-term bugaboos that the currency markets do not initially perceive as an immediate threat. Their focus is on the short- and medium-term aspects of economic stabilisation that could result from the coronavirus recovery fund.

2. America and the virus

The European states have done remarkably well in combating the coronavirus pandemic. Despite their differing national strategies, a uniform line of defence was discernible across the board, and it is now paying off. New infections remain within bounds, regardless of the short-term spikes attributable to regional outbreaks. In stark contrast to this, the number of new infections in the USA continues to rise dramatically. America does not have the virus under control.