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The Euro and Covid – What will the impact of a second wave be?

Fear has been dominating all the markets across Europe especially in relation to the euro and Covid. The rising cases of new COVID-19 infections and fatalities have compelled countries to begin reinstituting varying degrees of lockdown measures to stem what is seen as a possibly deadlier second wave of the virus.

Surges of infection in Belgium, Spain, France and the Netherlands have resulted in a state of emergency being declared in France. Lockdown measures being declared across major cities in Spain and other Eurozone countries are mulling their own versions of restrictions. The latest being the UK which has redesigned the restrictions into a 3-tier system to be enforced by different jurisdictions in reaction to the local infection conditions.

Germany, the largest economy in the EU, has just announced that Chancellor Angela Markel has agreed with nearly a dozen German mayors to implement varying degrees of restrictions in response to the infections rates and fatalities within their jurisdictions.

What Impact have we seen from the Euro and Covid?

All this uptick in the spread of the virus is taking a toll on the Euro. The currency appeared to be bouncing back after member countries eased restrictions and economic activity appeared to be recovering to pre-pandemic levels. However, as the virus continues to spread and we see significant restrictions in place this can quickly change.

The economy of the Eurozone has taken a huge hit and is expected to shrink by 8% this year. One of the reasons for the contracting economy is the toll the first and now the second wave of the virus has had on tourism in Europe. With the first wave slowing down, the governments were hopeful about opening the country and rebuilding the economy.

The second wave suddenly hit, and now, many governments in Europe are considering a second lockdown, including the UK. And the Euro is not left behind in the adverse effects of the second wave of COVID-19.

The fears of a resurgence have made the USD gain as a safe haven currency against the EUR which is regarded as being on a downward spiral as the second covid-19 wave grips the different member states.

In reality, when we review the EUR and Covid the downtrend hasn’t just started. Data shows that the currency peaked against the USD on 1st September, and then started trading sideways or sliding as October progressed.

That downturn happened at the same time that the US shook off (at least up until now) anxiety about a possible major hit from the second wave of the virus. The USD also has its own troubles, but since the politicians currently have their eyes on the upcoming election, the dollar has remained strong relative to the other major global currencies.

The Euro is known to be growth-sensitive, and now, the stricter and tighter COVID-19 restrictions on the Eurozone countries seem to be threatening its growth. The unexpected and drastic increase in the second wave cases is already placing a lot of pressure on the European Central Bank to do a better job at supporting the regional economies of the Eurozone countries. This is because the Euro is already showing the negative impact of the COVID-19 restrictions.

In October, the Eurozone services PMI reduced to 46.2, which is lower than the 47 that was expected from analysts and economists. It is expected that the ongoing developments of the second wave of the COVID-19 pandemic will be a bearing on Euro’s trajectory.

Some hope that, since this is happening before the European Central Bank’s monetary policy meeting, the central bank will consider the tight restrictions and the Eurozone country’s needs for support and help them enhance the currency.

The Second Wave of the Pandemic on Euro and other Currencies

Apart from just the Euro, the second wave has also affected the pairs concerning Euro, mainly the EUR/USD and the EUR/JPY. Here’s how:

EUR/USD

The RSI of this pair has failed to reach above 60 and is now in bullish territory. Not only this, but the exchange rate of this pair has also failed to go above an average of 1.1876 since August; instead, it has slanted to the downside. It is unlikely for an extended slide to happen to this currency pair.

The Euro and the US Elections

Ironically, the US election will not only determine how the USD fares post-elections. The fate of the EUR is also depending on who wins that election, and whether or not the outcome is contested by any of the parties. For example, a win for President Trump could mean that the USD tumbles since he doesn’t appear to be willing to sign another stimulus package. In such a case, the EUR would likely make substantial gains against the USD and that recovery may just be what the currency needs to surge forward ahead of other major currencies around the world.

The Euro and the GBP

The Pound Sterling (GBP) has also remained strong against the EUR, partly because there is hope that some deal will be agreed upon before the 31st December deadline. These hopes were strengthened after negotiations in London were extended and will continue in Brussels. The ongoing negotiations indicate that some progress is being made, unlike what would have happened if discussions had been called off.

A full list of the currencies that can be traded at Accuindex against the EUR can be found here.

The Euro and Brexit talks

France appears to be softening its stance on the issue of fishing, and this was one of the major sticking points which threatened to jettison the Brexit talks. The optimism of an impending Brexit deal has therefore shored up the GBP against the EUR.

That notwithstanding, the re-imposition of restrictions has put a lot of pressure on the EUR and the European Central Bank (ECB) is likely to be compelled to step in and offer monetary support to the member countries so that the region’s currency can regain its footing.

Covid’s Impact on Global Economies

Francesco Saraceno, an Italian economist, thinks that the pledge by the ECB President Christine Lagarde to continue providing monetary support to member states until the pandemic is contained is worth applauding. Saraceno says that the policies which have been adopted and implemented in the EU during this crisis have been instrumental in protecting jobs. This support needs to continue in order to give the zone a chance to recover, especially as fears that this second wave of the virus is going to worsen the overall damage caused to the region’s economies.

This is in contrast to what is happening in the US where the president dropped talks regarding a new stimulus package. Any gains which were made earlier are therefore likely to be lost as approximately 26 million Americans who were depending on the unemployment benefits will no longer be able to afford basic necessities.

This is where the pledge of the ECB President takes on even greater significance for the EUR since the currency is unlikely to suffer in the same way as what is lying ahead for the USD if no additional stimulus package is forthcoming while the pandemic rages on.

An essential factor driving the pressure on the Euro, is the number of coronavirus cases in the significant Eurozone economies. There are cases every day in countries like France, Spain, the Netherlands, and Belgium, while other countries like Germany and Italy seem to be keeping the second wave under control. Overall, the EUR remains extremely sensitive to any jitters within its member state. However, its fate may well be decided by events elsewhere, such as what the US Federal Reserve Bank does, rather than by factors within the Eurozone itself.

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