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EU Recovery Fund – A lot of progress but not quite there yet; But potentially more drivers of positive risk sentiment this week

EU Recovery Fund – A lot of progress but not quite there yet; But potentially more drivers of positive risk sentiment this week                                           

  • EUR: At the time of writing, there is yet still no agreement on the EU Recovery Fund at the EU Summit that started Friday. While the size of the package is agreed upon (EUR750bn) and the timing of when the fund commences distribution (early 2021), leaders are as yet unable to reconcile differences over how much of the fund should be distributed through grants versus low interest loans and conditions attached to the distribution. Yet, EURUSD remains well above 1.1400 this morning as differences seem to have narrowed considerably. Germany and France now want EUR400bn (53%) to be disbursed via grants (down from EUR450bn) whereas the “Frugal 4’ – Netherlands, Austria, Sweden and Denmark put that figure at EUR350bn (47%) though the latest news is that Denmark has accepted the EUR400bn figure for grants a significant and reconcilable compromise on their part given they had started with a position of EUR150bn via grants (20%). Further progress and headlines awaited!!                  
  • USD: But watch US high frequency data that may be starting to plateau - Citi analysts point to high frequency data in consumption/ hiring that now appears to be signaling a possible plateau in US activity. Against this, consensus forecasts are also moving higher, so the bar for continued positive surprises may also be higher in coming months.                    


Data releases Friday   

  • USD: University of Michigan consumer sentiment survey disappoints for July, coming in significantly below expectations at 73.2 (79.0 expected, 78.1 prior) with 1 Year Inflation Expectations at 3.1% (2.8% expected, 3.0% prior). The survey though is in line with the stagnation in some high frequency US activity indicators of late and on the margin, is likely to add to the pessimism around the efficacy of US reopening and keep pressure on USD.   


Week Ahead – US jobless claims to deteriorate, euro area PMIs to surge; Australian budget critical to AUD near term direction                                         

  • USD: Initial Jobless Claims – Citi: 1400k, median: 1280k, prior: 1300k; Continuing Claims – Citi: 17200k, median: NA, prior: 17338k - After being close to flat for a week, Citi analysts now expect an increase in initial jobless claims to 1400k for the week ending July 18. This would likely elicit negative market attention though seasonal patterns will be volatile around the Fourth of July holiday. Continuing claims face similar volatility in seasonal patterns, although to a lesser degree.                
  • EUR: Euro area Manufacturing PMI, Jul Flash Forecast: 50.5, Prior: 47.4; Services PMI, Jul Flash Forecast: 52.5, Prior: 47.3; Composite PMI, Jul Flash Forecast:52.0, Prior:47.5 – Citi analysts estimate that the flash composite PMI will increase in July for the third time in as many months. After a cumulative drop of 38 points in March and April, a final rebound of around 5 points is possible, taking the index back to its June 2019 levels, and showing the first increase in private sector activity since February. Citi analysts also estimate the risks to their forecasts are skewed to the upside. For manufacturing, the gain in July will probably be around half of that seen in June, but still enough to push the index above the 50.0 threshold for the first time since Jan-19. For services, a bigger uptick is likely, worth around 5 points, moving finally above the 50 level at the start of H2’2020.      
  • GBP: UK Manufacturing PMI, Jul Flash Forecast: 52.4, Prior: 50.1 - The manufacturing PMI likely edged above 50 for the first time since February. Citi analysts expect a further move into positive territory as the easing of lockdown measures accelerated. As such, while Citi analysts expect a large rebound in July, the breadth of the improvement may prove somewhat curtailed.        
  • GBP: UK Services PMI, Jul Flash Forecast: 52.8, Prior: 47.1 – Citi analysts expect a sharp rebound in the services PMI in the first weeks of July alongside the reopening of the consumer services sector. However, the outlook for the services sector still looks relatively challenged. While Citi analysts expect a widespread rebound in July, this is both 1) from a very low level and 2) will see output still well short of levels from Q4-19.  
  • AUD: JobKeeper and JobSeeker extensions - the Australian Budget Update from Treasurer Frydenberg on Thursday will likely include an extension of the government’s income support programs of JobKeeper and JobSeeker past their September deadline. Recall the Australian Treasury amended its costing of JobKeeper from AU$130bn to $70bn because of better than expected health outcomes. So, it’s more likely that the government will announce an extension of JobKeeper past September—at least till the end of the year—and alter the wage-rate of $1,500 (lower) and eligibility criteria after September.    
  • CAD: CPI NSA MoM (Jun) – Citi: 0.6%, median: 0.3%, prior: 0.3%; CPI YoY – Citi: 0.4%, median: 0.2%, prior: -0.4%; Consumer Price Index – Citi: 136.9, median: 136.6, prior: 136.1 – Canada headline CPI should rise 0.6%MoM in June following a bounce-back in prices that began in May and again led by stronger energy prices. Core measures of inflation should continue to trend lower below the BoC’s 2% target as demand remains depressed.      


This is is an extract from the Daily Currency Update, dated July 20, 2020. Please approach a Citigold Relationship Manager if you would like more information.

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