EUR/USD: European leaders are giving EUR a fresh boost – OCBC

EUR/USD bulls continued to catch markets offguard, rising by over 400pips in 4 days this week. A rare display of responsiveness and concerted willingness of European leaders agreeing to spend on defence is giving EUR a fresh boost. EU is proposing EUR150bn in loans to boost defence spending and is also planning to activate a mechanism that allow countries to use their national budgets to spend an additional EUR650bn on defence over 4 years without triggering budgetary penalties. EUR was last trading at 1.08 levels, OCBC's FX analysts Frances Cheung and Christopher Wong note. 

Pace of rise may moderate

"Chancellor-inwaiting Friedrich Merz also indicated that Germany would amend the constitution to exempt defence and security outlays from limits on fiscal spending to do 'whatever it takes' to defend the country. He added that the main center parties had also agreed to launch a €500 billion ($528 billion) infrastructure fund to invest in priorities such as transportation, energy grids and housing. This is about 11- 12% of German GDP and is planned to be disbursed over 10 years. Alongside the planned defence spending bills, there can be potential upside risk to German growth. "

"Today, EU leaders are meeting for a special summit to discuss continued support for Ukraine and European defence. We keep a look out if EU leaders continue to show political determination. Near term, the looming risk of US tariffs on Europe and upcoming ECB meeting (Thu) are some of the 2-way risks to watch for the EUR. Markets are likely to scrutinise the ECB meeting for signs of any slowdown in ECB easing cycle. Any hint of that should add to EUR recovery given that markets are still pricing about 70bps of cuts this year." 

"On tariffs, it is still uncertain when the 25% tariff on European auto and other products will be effective. Confirmation of the tariffs may see EUR dip but the pullback may not translate into a larger decline. Instead, it could be seen as a chance to buy dips, considering the emergence of new positive factors: a potential Ukraine peace deal, expectations of defence spending, a chance that ECB easing may slow, Germans attempting to form a coalition government fast and likely to increase spending/ support growth, etc. Daily momentum is bullish but RSI enters into overbought conditions. Pace of rise may moderate. We look for dips to buy into. Support at 1.07, 1.0575. Resistance at 1.0820 (61.8% fibo), 1.0970 (76.4% fibo)."