EUR/USD stages late reversal towards 1.1880 as US stimulus talk restart triggers USD weakness

• EUR/USD moved sharply higher in recent trade to around 1.1880, reversing earlier losses on a bout of USD weakness.
• News that US fiscal stimulus talks are restarting triggered the risk on that hurt USD.
• EUR ignored the EU Recovery Fund being vetoed as expected.

EUR/USD has recovered sharply back into positive territory on the day and pushed towards fresh highs around 1.1880 in recent in trade, leaving the pair within striking distance of weekly highs above 1.1890. An abrupt reversal in the Dollar Index (DXY), amid an injection of risk appetite, has seen the index reverse earlier gains to trade flat on the day around 92.30 (DXY had been as high as 92.70 earlier in Thursday’s European session morning).

US fiscal stimulus talks back on

Triggering the abrupt recent injection of risk appetite into markets in recent trade was the news that US fiscal stimulus talks are back on; Democratic Minority Leader of the Senate Chuck Schumer said that Republican Senate Majority Mitch McConnell had agreed to resume negotiations on another Covid-19 aid package. Meanwhile, Senate and House leaders are reportedly scheduled to meet today to discuss stimulus.

In response to the news of talks restarting, US equities and crude oil markets saw an immediate positive reaction, with the former recovering back into positive territory on the day. As described, USD saw a negative reaction. Moving ahead, Thursday’s restart in US fiscal stimulus talks might have come at the perfect time for a market that was just showing signs of starting to really get worried about the worsening state of the Covid-19 pandemic.

Of course, there is no guarantee that there will actually be a deal; the Democrats still want a big package ($2T plus), while the Republicans have maintained they want something smaller and more targeted ($500B). But with the election in the rear mirror, perhaps a compromise will be more palatable to both sides. Any progress towards a deal will of course continue to provide support for risk appetite and is likely to weigh further on USD, to the benefit of EUR/USD.

EU Recovery Fund and Budget vetoed as expected

EUR/USD has not reacted to the news that, as expected, the EU Recovery Fund and 2021-2027 Budget was vetoed by Hungary and Poland due to the rule of law provisions that had been attached to it (that threatens to withhold funds if certain democratic standards cannot be met). The focus now is on whether or not the bloc can get a deal with Poland and Hungary prior to the next EU27 Leaders meeting at the EU Council Summit on 10 December.

EUR/USD heads back towards the top of recent range at 1.1890ish

EUR/USD confirmed a 1.1814-1.1894 range on Thursday, after putting in lows of the day just ahead of the 16 November low at 1.1814. Amid the recent bout of USD weakness, the pair is well on its way back towards the upper limits of this range, given that it is now trading in the 1.1880s.

If EUR/USD continues to gain at its present rate, a previous uptrend that EUR/USD broke below on Wednesday, the one that links the 11, 12, 16 and 17 November lows, looks likely to come into play as resistance just below the 1.1900 mark, as will highs of the week and the top of EUR/USD’s current range in the 1.1890s.

If the bears manage to regain control and push the cross back towards the low 1.1800s again, the bottom of the range at 1.1814 will of course offer support, as will the psychological 1.1800 level and then the pair’s 21 and 50-day moving averages at 1.1791 and 1.1775 respectively.

EUR/USD one hour chart