Euro Optimists Get Their Chance, Yet Stars May Not Stay Aligned

(Bloomberg) --

The euro may extend gains this week on signs of a breakthrough in the coronavirus crisis, only to offer a fresh selling opportunity to traders.

The currency headed for the biggest two-day rally this month on rekindled global risk appetite. Optimism that economies may recover faster than expected should boost European stocks, tighten Mediterranean bond spreads and buoy the common currency.

Yet options pricing and technical charts show these currency gains may prove fleeting, with developments in the crisis yet to prove game-changers.

One of the main headwinds for the euro has been the seeming lack of coordination between monetary and fiscal authorities in the European Union, and that problem appears to be easing.

German Chancellor Angela Merkel and French President Emmanuel Macron agreed to support a 500 billion-euro ($547 billion) aid package to help the area recover from the pandemic. And European Central Bank President Christine Lagarde said she’ll continue with the institution’s bond-buying, despite a German court questioning the legality of one of the programs.

Add to the mix signs that Moderna Inc.’s experimental vaccine may be capable of fending off the virus, and stars seem to be aligning for the common currency. The euro rose 0.2% to trade at $1.0932 as of 9:00 am in London.

Yet charts and options suggest that a sustainable move above resistance at $1.1018 is not guaranteed. Investors still need a large premium to own downside exposure in the euro over the medium- to long-term, while the currency remains firmly within a bearish trend on a technical basis.

Trade risks lurk: tensions between U.S. and China have picked up while the U.K. and the EU are heading toward a stalemate on their Brexit negotiations. Euro optimists may also need to consider that the market never priced in the possibility that a vaccine wouldn’t be found and that the knee-jerk reaction may soon fade, with the trial still in the initial phase.

And while an existential crisis may have been averted for now in the euro area, questions will persist until details of the aid package are revealed.

• NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

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