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EUR/USD drifts sideways amid a bearish trend to start the week

EUR/USD was largely unchanged in a narrow range to start the week, but analysts are watchful for further headwinds

EUR/USD tracks sideways as traders await developments

The lack of volatility in Asian trade preceded what will be a light data schedule on Monday.

February trade numbers are the only data point scheduled out of Europe, while the US will get the Federal Reserve Bank of Chicago's monthly economic activity index.

Looking at the week ahead, traders will be watching if EUR/USD can hold and consolidate above the $1.08 level, where it found support after a renewed bout of selling following the Easter break.

For EUR/USD, key data and events will be led by a video meeting of European Council leaders scheduled for Thursday.

At stake is whether member states will agree to a proposed €540 billion funding package in response to the Covid-19 crisis.

Initial indications were that Italy may reject the deal, on the grounds it imposes excessive austerity restrictions on countries with existing debt problems.

However, an agreement would help foster optimism around the capacity of member states to work together.

For now, consensus agreement around a shared Eurobond (or 'Coronabond') to help finance the coronavirus response remains off the table.

The impasse is largely due to scepticism among wealthier northern countries, such as Germany and Netherlands, that the shared debt arrangement would effectively act as a bailout for member states with shakier government finances.

While the €540 billion recovery package would assist with eurozone stability, Bank of America forex strategist Athanasios Vamvakidis said it doesn’t fully address insolvency risks faced by some periphery countries.

'The debt dynamics of some of the eurozone periphery countries are very challenging based on our debt sustainable analysis', Vamvakidis said. 'We don't believe the market is pricing these risks now, but it is a matter of time.'

Traders play it safe to start the week

Global markets adopted a notable tone of caution ahead of the London open, with FTSE futures edging lower while US stock futures are also in the red.

The moves follow a strong rally over the past month, as markets responded to historic government stimulus measures.

The growth curve of new Covid-19 infection rates also remains in focus, with New York governor Andrew Cuomo indicating over the weekend the growth rates appear to have peaked in New York’s most populous state.

However, uncertainty continues to linger around the broader economic impact of the crisis, and a reduction in risk-on sentiment could prompt increased support for the dollar.

At the peak of market volatility in March, a shortfall of dollars saw global capital flows surge into the greenback, as EUR/USD briefly fell below $1.07.

Emergency market operations from the US Federal Reserve helped free up the flow of dollars as markets normalised.

However, further caution across global markets this week could see another round of demand for the world’s reserve currency, which acted as a safe haven the last time volatility spiked.

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