- Euro strengthens into EU Council meeting

- EU leaders to discuss recovery fund

- but disappointment could bruise EUR short-term

Above: Charles MICHEL, President of the European Council. File image. Copyright: European Union

The Euro exchange rate complex will be prone to volatility on the outcome of today's European Council meeting that will see EU leaders gather to discuss the details of the proposed €750bn coronacrisis recovery fund.

The 'Next Generation EU' recovery fund that in its current format would see the European Commission secure €750bn, using the EU budget as a guarantee.

The fund is being touted as a decisive step for the EU towards recovering from the coronacrisis, but perhaps more significantly is seen as a real move towards closer fiscal union in the EU, something markets have welcomed by bidding the Euro higher.

The Euro has risen against the Dollar, Pound and other major currencies over recent weeks, with analysts pointing to the recovery fund as a reason. According to a new report from Fitch Ratings, the proposed 'Next Generation EU' recovery fund could be a net supportive factor for EU sovereign ratings, depending on its final design.

According to Fitch, if the fund evolved into a permanent structure with some fiscal risk-sharing that enhanced the capacity for counter-cyclical policy and central debt issuance, which "would help to strengthen the single currency".

The Euro-to-Dollar exchange rate has rallied to 1.1213 on the back of improved sentiment towards the EU and Eurozone, meanwhile the Euro-to-Pound exchange rate has rallied to 0.9010 (Pound-to-Euro down to 1.1099).

"EUR/USD will take its direction from today’s European Council meeting. EU leaders will discuss a €750bn recovery fund to respond to the coronavirus crisis and a new EU long term budget. Germany and France are reportedly keen to seal a deal on the fund by the end of July," says Kim Mundy, foreign exchange strategist at Commonwealth Bank of Australia.

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— EU Council Press (@EUCouncilPress) June 18, 2020The fund is designed to finance grants and loans to EU member states to support recovery and resilience measures.

Funds would be allocated according to the size of a member state's economy, population, unemployment rate, and caps would aim "to avoid excessive concentration of resources", using a formula that aims to make countries hit hardest by the coronavirus the main beneficiaries.

Should the fund proceed as is currently being proposed by Germany and France, the Euro would likely remain supported.

Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more.

"The creation of a new large and liquid (likely), higher-yielding AAA asset will attract inflows from real money investors and reserve managers alike and support EUR higher," says Graham Secker, Chief European Equity Strategist at Morgan Stanley.

However, there is a rub: not all states are on board with the current proposals and therefore disappointment could well undermine the recent positivity towards the single-currency and potentially allow an under-pressure Pound-Euro exchange rate to stage a recovery.

"Markets will look for headlines from the EU summit discussing the framework of an EU €750 economic support package. Internal discussions between member states on whether/how much of the aid should be distributed via loans or grants almost certainly won’t be solved today," says Mathias Van der Jeugt, an economist at KBC Markets in Brussels.

Reports suggest a group of countries known as the 'frugal four' will push back against France and Germany's plan.

The Financial Times reports Dutch prime minister Mark Rutte, who has long relied on Germany to champion EU fiscal discipline, will push back on integrationist attempts to mutualise debt or relax deficit rules. "On Friday, he will face off against German chancellor Angela Merkel in resisting a Berlin-backed spending plan to help the EU recover from its gravest recession," reads the report.

Rutte and the leaders of Austria, Denmark and Sweden are expected to call for a "realistic level of spending" and for all the money to be paid back.

The resistance confirms that the Euro-supportive funding plan is unlikely to be passed in its current format. For markets, the question then becomes whether the final deal will offer what is needed for investors to take a fundamental relook at EU assets and the Euro.