The EUR/USD pair has been rallying hard over the past two weeks or so and shot to its highest level since January 2019 on Monday. The upsurge defied worries about slowing growth in the Eurozone and was primarily sponsored by risk-averse investors unwinding carry trades. The common currency had been a funding currency of choice due to ultra-low (negative) interest rates in the G10 FX space. However, nervousness about the coronavirus outbreak sent the global financial markets into a tailspin and forced investors to buy back the Euro that was used as a liquid currency to finance riskier investments, which became less appealing on the back of rising market volatility.
Meanwhile, the increasing number of coronavirus cases outside of China fuelled concerns that the global economy might be headed for a recession. The Fed was quick to respond and announced an emergency rate cut of 50 basis points on March 3. This was the biggest one-time cut since the 2008 financial crisis amid increasing unease over the economic effects from the novel coronavirus spread. Investors, however, seemed unconvinced that monetary policy could avert economic devastations from a prolonged period of supply disruptions caused by measures to contain the virus.
As investors assessed the economic damage caused by the coronavirus, collapsing oil prices further worsened the already fragile situation on Monday. The commodity recorded its biggest single-day rout since the first Gulf war – falling around 30% – and notched the lowest level since 2016 in reaction to a possible price war between Saudi Arabia and Russia. Saudi Arabia slashed its official selling prices and made plans to ramp up crude output next month after Russia refused to agree to deeper output cuts proposed by the OPEC+ alliance.
Investors Eye more Fed Rate Cuts
The latest development turned out to be a big psychological blow for the markets and triggered a massive selloff across the global equity markets. Having recorded its worst performance in a week since the 2008 financial crisis, the S&P 500 index plunged 7% during the opening trade on Monday and triggered a rarely used circuit breaker. The disorderly market moves further explains the case for firming expectations that the Fed will have to make further aggressive easing to cushion the economy and combat any fallout from the virus outbreak.
Markets have fully priced in another 50 bps Fed rate cut at the upcoming meeting on March 17-18, while some analysts expect that borrowing costs will hit the zero lower bound by April. Against the backdrop of the global flight to safety, expectations that coronavirus-driven monetary easing by the Fed will run deeper pushed the yields on the benchmark 10-year Treasuries under 0.5% for the first time. This coupled with the fact that policy rates in the US have more room to fall than any similar action in Europe further lowered the dollar’s relative yield advantage against its European counterpart.
ECB is in an Awkward Spot
All eyes will now be on the European Central Bank (ECB) rate-setting meeting on Thursday. The euro’s sudden bullish turn may provide an added incentive for the ECB policymakers to cut interest rates. However, with its deposit rate already at -0.5%, the ECB looks alarmingly short of options to confront the external shock and is likely to have intensive discussions on what to do. The ECB will have to carefully address the need of the hour amid debate if further cuts would do more harm than good. The ECB might still cut the deposit rate by 10bps and announce a temporary increase in the QE volume to €30-40bn/month for at least six months. Meanwhile, the ECB President Christine Lagarde may once again urge governments to take the lead and increase public spending.
The USD gets Temporary Reprieve
Using fiscal measures to boost the economy is believed to support the domestic currency. The same was reinforced by a sharp USD rebound on Tuesday, supported by hopes of fiscal stimulus by the Trump administration to mitigate the impact of the COVID-19 on the US economy. The market reacted positively after the US President Donald Trump on Monday said that he will be meeting with Senate and House Republicans on Tuesday to discuss a possible tax relief measure to provide a timely and effective response to the coronavirus.
Consequently, the pair faced rejection near the key 1.1500 psychological mark and witnessed some long-unwinding trade, albeit lacked any strong follow-through. The pair is yet to close the weekly bullish gap, which suggests the presence of some dip-buying interest at lower levels. Nevertheless, narrowing rate differentials between the US and the euro area should help limit any deeper losses, rather trigger another leg in the common currency’s recent rally.
The recent rally assisted the pair to finally confirm a bullish break through over one-year-old descending trend-channel. A subsequent move beyond 200-week SMA already seems to have shifted the near-term bias in favour of bullish traders. Meanwhile, RSI on the weekly chart has been gaining positive traction and is still far from being in the overbought territory. Conversely, MACD indicator is yet to catch up with the recovery move and seemed to be the only factor that prompted some profit-taking.
The pair struggled to find acceptance above the 38.2% Fibonacci level of the 1.2556-1.0778 downfall. The mentioned hurdle is pegged near the 1.1450-60 region, which should now act as a key pivotal point for the pair’s next leg of a directional move. A convicting break through is likely to pave the way for an extension of the positive move, possibly beyond the 1.1500 handle, towards testing 2019 swing highs resistance near the 1.1570 region. Some follow-through buying has the potential to lift the pair further towards 50% Fibo. level, around the 1.1660 region.
On the flip side, immediate support is pegged near the 1.1300 handle. Failure to defend the said support might trigger some technical selling and accelerate the pullback further towards the 1.1260 horizontal zone en-route 23.6% Fibo. level support near the 1.1200 round-figure mark. The latter coincides with the descending trend-channel breakout point and should act as a strong near-term base for the major.