• The common currency jumped to a week high against the dollar on Monday amid hopes for the COVID vaccine.
  • Logged its best day in over two weeks and closed above 50MA. USD down again across the board.
  • The common currency has broken two key resistances, hinting a substantial upward momentum.

 The return of USD weakness, which should allow the G10 and EM FX to perform better: 

The USD decline remains the key theme overnight, with the dollar index -0.60% to 99.50. The dollar is now looking it like it will fall to the lower end of the symmetrical triangle. AUD and NZD were the biggest movers overnight, up +1.60% each. But the EUR and GBP up 0.90% each only. Our subject currency has been struggling to break ranges against the dollar; we do not rule out a breakout higher this week.

 Sentiment: Market sentiment has been improving from April levels as investors are keen to gauge whether there are any emerging signs of restarting economic activity and Vaccines hopes. Most of the European assets’ gains led by a positive outlook by the German Central Bank. Every day new virus cases are coming down, lockdown easing rules; as a result, we expect some economic activity improvement markedly over the coming weeks. Different countries are now taking measures to kick start their economies; Whereas the recovery will be gradual, we believe.

Top headlines overnight were the German Central Bank released a positive outlook in the German economy, and Japan has entered recession officially. And German and France have agreed to support the 500bn euros Recovery fund.

The German central bank expects to ease lockdown restrictions to boost activity in Europe’s powerhouse. “Many indicators that will move up again in the course of the second quarter” was the magical phrase to investors. But last week preliminary calculations by the German Federal Statistical Office (Destatis), German economic output fell by 2.2% on the quarter in the first quarter of 2020. “This was the largest decline since the global financial and economic crisis in 2008/09 and the second-largest decline since German unification,” the experts in Berlin said, Bundesbank reported.

Flipside, earlier Fed chairman Jerome Powell said the US economy could contract by 20-30% in the crisis, and the downturn could last until 2021.

“Fed Chair Powell, who is not an economist, gave an interview on economics over the weekend. Full recovery for the US was signalled for 2021. While GDP growth is likely to bounce back in the third quarter (with delayed demand and enforced savings), the level of GDP is not likely to return to where it was in 2019 for some considerable time”. UBS reported.

 FX: Overnight, the Euro was mixed against the most trading currencies. EURJPY was the leader with 1.20% gains, followed by EURCHF and EURUSD 0.90% each, whereas the Euro was down by 1.10% each against AUD, NOK, and NZD. Among EUR crosses, EURCHF logged its best intraday day gain since October 2019. The new range is 1.0700-1.0500 up from 1.0610-1.0500 levels. 

Data review:

  • GDP decreased by 3.8% in the EA during the first quarter of 2020, according to destatis, whereas the Germany economy contracted by 2.2% during the same quarter.
  • March Industrial production down by 11.3% in the euro area, according to estimates from Eurostat.

 Data preview: A busy week ahead that kicks off with May ZEW sentiment today, April CPI, on Wednesday and May PMIs for EZ and Germany on Thursday. 

  • Back in April, the ZEW indicators of economic sentiment for Germany has risen by 77.7 points, valued at 28.2 points. It was a significant rebound from March collapse. We will see a clear risk that sentiment is continuing to bounce back, whereas the May sentiment reading number could not be a game-changer.
  • Flash services and Manufacturing PMIs for EZ and Germany.

“Material downside risks likely remain in the Manufacturing PMIs, while the Service PMIs will be distorted by the “diffusion index disease” and may even jump above 50. Apparently, most economists haven’t figured out how PMIs work yet, judging from the consensus figures for next week”, according to Nordea Markets.

 TECHNICAL OVERVIEW

The common currency, EUR higher again on Monday, logged its best day in over two weeks and closed above 50MA.

The Euro extended its rally on Monday and breached a key resistance at 1.0900 against the dollar. It closed the session at 1.0915 against its previous close of 1.0820. The common currency has broken two key resistances i.e, 1.0850 and 1.0900, hinting a substantial upward momentum. The nearest resistance from the current level is at 1.0960, beyond which the resistance comes in at 1.1010. On the downside, 1.0850 can act as good support. Until the Euro stays above 1.0760 (up from last week’s 1.0720), it can be approached with a bullish bias.

Overall, EURUSD has strong support at 1.0770 and 1.0720; a revisit of 1.0600 levels looks unlikely in Q2. We have been recommending this for the past two weeks and like to retain the strategy this week as well.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

What is your Technical View?

Do you have a different idea? Please leave us a comment and get an answer from our professional analysts