Euro at Risk on EU Digital Sovereignty Stance, USD Eyes Stimulus Talks

EURO AT RISK ON EU DIGITAL POLICY STANCE

The Euro may endure the brunt of the European Union’s policy stance on digital sovereignty as the bloc risks angering China and the United States, resulting in fighting a digital war on two fronts. The latter last year expressed discontent over France’s attempt to implement a digital tax that subsequently led to threats of tariffs against goods ranging from porcelain to luxury handbags. The Euro subsequently suffered with local stocks.

The EU has also experienced frequent run-ins with technology giants like Google, Apple, Facebook and Amazon – shorthanded as GAFA – that have damaged cross-Atlantic relations. Consequently, the EU’s turn inward in this regard threatens to further widen the rift between the two allies at a time when inter-regional cooperation is needed most amid the worst economic recession in a century.

Brussels has joined an international chorus of voices sounding the alarm about Huawei and the potential national security risks it poses in its involvement in 5G installations. The UK recently banned the Chinese tech giant from its 5G network, thereby putting pressure on the EU to follow suit despite growing Sino-EU cooperation in major infrastructure projects like the Belt and Road Initiative.

From a market-oriented perspective, “digital balkanization” – meaning a lack of digital standardization – could create obstructions to regional and continental commerce. One of the risks may be a rise in the cost of business as firms hoping to sell their wares without incurring penalties are forced to hire experts at manoeuvring through a labyrinth of local digital laws.

Increased tension in this area between the US and Europe could not only slow down cross-Atlantic trade and investment but also spill over into other areas of policy like what investors saw with France. An acceleration of this trend could further damage what are already-fragile EU-US relations and undercut the Euro’s gains while possibly giving a tailwind to the haven-linked US Dollar.

US DOLLAR BRACES FOR CORONAVIRUS RELIEF AID

US lawmakers continue to debate over the distribution of funds for another coronavirus stimulus package as the $600/week provision from the $2.2 trillion CARES Act bill expired. With millions still unemployed, lawmakers are now feeling the heat from their constituents who have suffered a sharp drop in their monthly budget.

After a multi-hour meeting on Saturday, Treasury Secretary Steven Mnuchin said that “there’s still a lot of work to do” on breaking the impasse over conflicting priorities between Democrats and Republicans. One of the core issues continues to be over whether to have a short-term extension of enhanced unemployment benefits or attempt to ratify an all-encompassing agreement.

Last Friday, Senate Majority Leader Mitch McConnell said that Democrats and Republicans are “light years apart”. This may help explain why the foreign exchange markets reflected a risk-off tilt at the close. The US Dollar’s haven appeal was briefly bolstered after it had been in part responsible for the Greenback’s precipitous decline over the past few weeks. Delayed talks and unresolved issues could amplify this dynamic.

BRITISH POUND SUSPENDED OVER BREXIT TALKS

The politically-sensitive British Pound continues to remain suspended in an ethereal fog of ambiguity as policymakers scramble to make progress ahead of the December 31 Brexit deadline. The UK and EU have scheduled trade negotiations all the way until October 2. Brussels has made it clear that London has to present an agreeable deal by October so the 27 European leaders have enough time to ratify it.

The UK’s chief Brexit negotiator David Frost said that “negotiating rounds will take place in August and in September, unless agreed otherwise between the parties” ahead of an EU summit from October 15-16. Many issues – one of the big ones being fishing quotas – continue to hinder the timely adoption of a resolution. As the deadline draws near, British Pound crosses will likely become more sensitive and prone to volatility.

GBP/USD ANALYSIS

GBP/USD is stalling just short of the pre-March plunge at 1.3212, but favorable fundamentals could push the pair to retest the multi-month ceiling. Conversely, if GBP/USD has indeed lost steam and is bound for retreat, selling pressure may swell until a key inflection point at 1.2877.

Below that lie several proverbial substrates which may make drilling lower comparatively more difficult than bouncing off of 1.2877 in what appears to be a relatively unobstructed area.

GBP/USD – Daily Chart

GBP/USD chart created using TradingView

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