Marius Paun | London, UK | Senior dealer | Wednesday, 26th February 2020
The euro and the US dollar are by far the two largest currencies in the world, accounting between them, for more than three-quarters of the foreign exchange reserves. As the most liquid currency pair, EURUSD is undoubtedly the most important price on any trader’s radar.
Last week the euro touched a low of 1.0777 against the greenback following the spread of coronavirus outside China. Heightened fears that the outbreak could become a global pandemic sent investors into the safe haven of the US dollar.
Hotspots outside China (the epicentre of the outbreak) are now South Korea, Iran and closer to home in Europe, we have Italy. Milan, Italy’s financial hub and neighbouring Lombardy and Veneto regions, which together make up a third of the country’s GDP, are now in virtual lockdown. Schools and universities are closed, there’s a curfew imposed on bars, so concerns that the already weak economy could tip into recession are rather serious. So, it is easy to see why market participants expect the EURUSD specifically to move even lower, not only because of the panic in Italy but also because the eurozone is much more exposed on exports to China, than the United States or the United Kingdom.
Counterbalancing the situation somewhat was the US economic data released last Friday, which showed the first decline in the services sector output in 4 years. That sparked fresh concerns the world biggest economy might not performing as well as previously thought, given that services make up over 80% of the US economic output. A weaker than expected US consumer confidence added to the downside pressure on the US dollar. Consequently, on a relatively short term basis, the shared currency was allowed a rebound, and the EURUSD is now trading around 1.0870 handles.
At the same time, markets have started to increasingly price-in a US interest rate cut by the Fed, possibly as soon as April this year. Stocks markets tumbled sharply this week with S&P 500 posting the worst two-day slide in four years and losing over $1.7 trillion in just two sessions. The sell-off was exacerbated after Washington health officials warned that ‘coronavirus is likely to continue to spread into the US and could become an epidemic’.
Despite the recent news causing markets to reach near panic levels, it is important to remember the EURUSD was in a downtrend long before the coronavirus outbreak, as the long-term chart indicates. Since 2008 the euro has been in a clear bear market defined by the red lines within a tradable channel. But within that secular downward move, we can also see counter-trend rallies lasting for 12 months or more.
At the beginning of 2020, the EURUSD was over 1.12, now the market price is struggling to break back above 1.09. The main driver before the COVID-19 was the strength of the greenback. Capital is moving to the US, be it for stocks, bonds or the perceived stability of its currency. On the other hand, the euro has weakened lately against all major currencies, the Japanese Yen, the Swiss franc, the Canadian dollar. Britain exiting the European Union did not help either, coming at a time when the economic data coming out of the eurozone is hardly encouraging.
On the upside, we see good resistance at 1.09 mark followed by 1.0980 and 1.1020. The bulls will spot the fact that the moving averages are getting close to cross over i.e. short-term MA breaking above the long-term MA.
If they were to cross it would signal additional buying power and also the possibility of another of the aforementioned counter-trend rallies being underway. Breaching the upper red channel line could prove a serious challenge though.
On the downside, the next target area is support just above 1.05, the lows of 2015. A confirmed break below that could attract more sellers looking to push the price down and test support around 1.0350, the low of early 2017. Should those levels give way we are potentially looking at the lower boundary of the red trend channels, the under-parity $0.9 area? Expect some psychological support around parity before we test those levels!