Euro spikes to monthly highs ahead of ECB and EU leaders meetings
The euro is on an upward trend as investors remain optimistic about Europe’s recovery ahead of the ECB interest rate decision. In the past five days, the euro index has gained by almost 1 per cent. Individually, the common currency has gained by 0.70% against the US dollar, 0.95% against the sterling, and by more than 1.30% against the Swiss franc.
ECB meeting in focus
The euro has gained partly because of the upbeat economic data from the Eurozone. Economic numbers released by Eurostat yesterday showed that the industrial production rose by 12.4% in May after dropping by 28.7% in the previous month. Early this month, manufacturing and services PMI numbers by Markit showed that the region is making steady progress.
This performance will be put to test yesterday, when the European Central Bank (ECB) delivers its interest rate decision. Analysts polled by Reuters expect that the Christine Lagarde-led bank will leave interest rate and its quantitative easing program untouched.
The bank implemented these programs in its bid to support the economy. Low interest rates work in two ways. First, they encourage spending by consumers and companies because savings attract minimal returns. Second, they lower the cost of borrowing by both companies and individuals.
On the other hand, quantitative easing is a process in which the bank creates new money and buys a variety of assets like mortgage backed securities (MBS) and government bonds. These purchases enhance liquidity in the market and helped to lower the cost of borrowing. In its most recent meeting, the ECB decided to add €600 billion into its €750 billion program.
European recovery fund eyed
The euro is also gaining because of an upcoming meeting by European Union leaders on Friday. The main goal of this meeting is to deliberate on a €750 billion recovery fund that was proposed by the European Commission in June.
According to the commission, the EU will borrow these funds from the bond market and give it to member states in form of grants. The goal is to help these countries fund their recovery process.
A key challenge is that some countries are opposing the size and structure of the funding. These countries, which have been nicknamed as the “frugal four” are Austria, Denmark, Netherlands, and Sweden. Instead of grants, they propose giving out the funds in form of low interest loans. On the other hand, countries like Germany, France, Italy, and Spain support the proposals by the commission.
Therefore, the euro is rising because investors believe that Angela Merkel and Emmanuel Macron will be able to convince the frugal four about spending.
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