EU Council Meeting: The wider implications for the euro

11 December 2020

The European Council Meeting that started on Thursday and continues today aims to conclude a hectic year for the EU. It will provide a lot of room for speculation as to where we could see the value of the Euro amid significant Brexit uncertainty, the next EU budget and various ECB policy decisions.

Brexit

Ursula von der Leyen spoke with Boris Johnson on Wednesday over dinner and, after three hours, concluded that the EU and the UK should continue negotiating until Sunday, when they will take a decision on whether to continue this process. The consensus is that the EU and the UK will decide to continue negotiations after Sunday, and that a ‘skinny’ free trade agreement will be thrashed out before the transition period ends on 31st December. The probability of a deal fell this morning, however, when von der Leyen signalled that no-deal is the most likely option.

In the meantime, Sterling has fallen significantly today, over one percent, as investors are positioning themselves for a no-deal Brexit. Official comments from von der Leyen and Johnson could be put down to political posturing whereby a last-minute deal looks like a breakthrough rather than a formality. This in turn looks good to voters on both sides of the channel. However, investors are taking these comments to be fact, causing GBP to weaken.

This week, GBP has traded at near two and a half year highs and there is certainly scope for the currency to continue to fall in value. We think Sterling will likely trade in a tight range until we get clear guidance on what Brexit will look like. This could be as late as 28th December.

EU budget

In contrast to Brexit negotiations, the EU this week finalised their budget and the €1.8 trillion post-pandemic recovery package. Concerns that Hungary and Poland would hold up proceedings were alleviated by a non-binding declaration that assured Member States that they would not be singled out under the new rules. This new budget allows Brussels to implement its €750 billion recovery fund in a much-needed boost to the economy and businesses.

While this budget was largely as expected, it prompted the Euro to rise by 0.25% against GBP, minutes after the announcement. There was no substantial movement against USD. The US stimulus bill discussions are also ongoing and are unlikely to be resolved before the new year, which means Eurozone residents and businesses will benefit from a substantial fiscal package before their American counterparts. This benefits Eurozone businesses, leading to potential Euro strength in the longer run.

ECB policy decision

The ECB recently announced their new policy decision in Frankfurt, and although this is not explicitly related to the EU council meeting, it has wide implications for all EU members, such as how consumers spend, or how businesses expand. To no surprise, the ECB kept their deposit rate unchanged at -0.5%, while also increasing the size of its pandemic emergency purchase programme (PEPP) by €500 billion.

The Euro initially rose against the dollar by 0.2% after the announcement as investors welcomed the increase in monetary stimulus. During Christine Lagarde’s press conference the Euro further increased by 0.4%. Lagarde’s suggestion that the PEPP may not be fully spent caused some alarms and opened the door for investors to believe monetary stimulus could be lower than projected, the most likely reason behind the EUR appreciation.

During this turbulent week, the European Council meeting and ECB policy decision caused optimism for the Euro and confirmed the consensus outlook of EUR strength heading into 2021. An injection of stimulus for businesses combined with a fall in the demand for the USD and GBP could result in considerable EUR strength in the coming months.