By Peter Nurse – The EUR was in high demand in Europe’s early trading on Wednesday, hitting its highest level in four months after Federal Reserve Governor Lael Brainard hinted that an even easier monetary policy in the U.S. was needed.

The dollar also suffered more broadly from an increase in risk appetite after late Tuesday’s release of positive data on one of the leading candidates for a Covid-19 vaccine.

At 2:55am (0655 GMT), it gained 0.1% to 1.1408, after reaching its highest level since March 10 at $1.1423 earlier in the session. The EUR fell 0.2% to 0.9060, as sterling was helped by stronger than expected inflation figures in June, but the EUR posted a two-week high at 0.9112 last Tuesday.

In addition, the U.S. dollar, which tracks the greenback against a basket of six other currencies, fell 0.1% to 96.093, gained 0.4% to 1.2595 and remained stable at 107.23

The single currency benefited from the perception that the region handled the Covid-19 crisis better than most other regions, as it rose 1.3% against the dollar in the past month.

“Germany, France and Italy have all taken severe lock-in measures and, as a result, the coronavirus now appears to be under control. The economy could recover gradually,” Bart Wakabayashi, manager of the Tokyo branch of State Street (NYSE:) Bank and Trust, told Reuters.

However, the economic situation remains bleak. Just last week, the European Commission downgraded its outlook for the EU economy, saying it would now contract by 8.3% in 2020. However, recent confidence data is trending upwards, with Tuesday’s German ZEW survey indicating that optimism will be maintained over the next six months.

Looking ahead, “the upcoming ECB meeting is not expected to change much, with the discussion/progress on an EU stimulus fund being a more important short-term driver for the EUR/USD,” ING analysts said in a research note.

Doubts remain as to whether EU leaders will be able to reach agreement on a €750 billion pandemic recovery fund at this week’s summit, in the face of resistance from more frugal Member States.

That said, German Chancellor Angela Merkel, who currently holds the presidency of the EU Council, is in no doubt about the need for the fund and the importance of its size.

“Because the task is huge, the answer must be huge too,” she said on Monday, after receiving Italian Prime Minister Giuseppe Conte for talks.

“It must be particularly powerful in order to send a clear signal that Europe wants to remain united in these difficult times. There is a political dimension to this”.

Any potential progress on the stimulus fund at the EU summit “should translate into support for the EUR/USD for the rest of the week, with the ECB meeting playing a secondary role,” ING added.

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