• EUR underperforms against other European currencies and the dollar.
  • Today German’s constitutional court decision is the driver to EUR.

The brand-new week has begun with risk-off mode. This sees dollar outperform against the majors and JPY in demand. The risk-off style was elevated by the more cautious tone led by two factors. US-China trade tensions and Warren Buffet wasn’t optimistic about the global economic outlook.

US-China trade tensions elevated as both countries are blaming each other. U.S. President Donald Trump is reportedly looking for ways to retaliate against China for the delay virus that originated from China. Several countries are already suing China for economic losses.

The latest survey report suggests negative views of China continue to grow in U.S. Pew Research Centre reported, 66% of Americans have an unfavorable opinion on China.

Thomas Harr, Ph.D., Global Head of FI&C Research, said, “Trump may hold back on new tariffs ahead of the election, due to fear of repercussions for the economy and stock markets. However, he could impose new tariffs on China (and Europe) if he wins the election”.

At his weekend first virtual shareholder meeting, Warren Buffet expressed his concerns on the global economic outlook. The famed investor discussed the impact of the coronavirus pandemic. “There was an extraordinarily wide variety of possibilities on both the health side and the economic side,” Buffett said. And he warned on the negative interest rates meaning that “We are doing things that we don’t know their outcome.”

Overnight the risk-off mode pushes the Euro down against the most trading currencies. NOK up by a percent followed by AUD and JPY by 0.80% each. And USD up by 0.50 against the EUR. On Monday, the common currency was the weakest of the majors, settle at 1.0900 levels. Among EUR crosses, I am a bit worried about EURCHF price action. 1.0500 is the floor now. Will it hold is the key concern to me. Italy’s 10-year bond fell to 1.753% besides the U.S. yr yield is holding at just 0.64%. The EURCHF is likely to be affected by the Italian BTPS.

The Corona crisis has sent the world economy into recession and is presenting the global economy with unprecedented challenges. The global situation continues to fall at the beginning of May, marking new all-time lows in many regions of the world, according to Sentix.

Euro was the winner: Last week was a mega week for central banks as ECB and Fed had meetings, including BOJ. What we learned in each central bank hold rates, and they are likely to keep the lower rates for a long time. All three central banks said that they are here to support the economies as long as the support needed. The European Central Bank didn’t increase the bond-buying, but they gave cheaper loans to banks. And said it is willing to increase bond buying at any time if needed. Besides, the Fed didn’t say anything new but maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. In a nutshell, global central banks are all willing to do what they can, especially liquidity, as per official press statement.

The Euro was the winner of the Fed and ECB meetings. Post the meetings, EURUSD finished 2% higher with a strong three bullish candles. Technically a long position in EURUSD looks compelling.

Data review: The first-quarter GDP from E.A. and the U.S. pointed a sharp decline.

GDP down by 3.8% in the euro area, according to a preliminary flash estimate published the Eurostat.

May Sentix investor confidence improved slightly to -41.8 from -42.9 in April 2020. We are at the beginning of a stabilization phase, which is already clearly visible in Germany and especially Austria, according to the official report.

As expected at last week’s meeting, ECB keeps its Main Refinancing Rate unchanged at 0.0%, and ECB announced new refinancing operations. 

  • The conditions on the targeted longer-term refinancing operations (TLTRO III) have been further eased. Specifically, the Governing Council decided to reduce the interest rate on TLTRO III operations during the period from June 2020 to June 2021 to 50 basis points below the average interest rate on the Eurosystem’s main refinancing operations prevailing over the same period.
  • A new series of non-targeted pandemic emergency longer-term refinancing operations (PELTROs) will be conducted to support liquidity conditions in the euro area financial system and contribute to preserving the smooth functioning of money markets by providing an effective liquidity backstop.

Data preview: It will be another busy week with U.S. jobs data and German’s constitutional court decision. Besides, retail sales and industrial production grab some attention.

Nonfarm payrolls are set to decline more than 20 million, and the unemployment rate could spike to 20%. Americans have filed more than 30 million claims in the last six weeks, which hasn’t looked this bad since the 1930s as per sources.

“We are likely to see an employment drop of c.25m and an unemployment rate of 15-20%”. Danske Bank said in a weekly note.

“Our team looks for 21 million jobs to be lost in the April nonfarm payrolls report, triggering a spike in the unemployment rate spike to 16%. A further decline of 12 million jobs and a rise in the jobless rate to 22% may be seen in the May report”. ING reported.

Besides, euro investors wait for Germany’s constitutional court final ruling tonight on the legality of the ECB’s asset-purchase program, a case that has dragged on for nearly five years.

“The case filed by a group of conservative businessmen and academics argues that the ECB is overstepping its authority with the Q.E. program and removing the incentive for E.U. countries to pursue the sound fiscal policy. Expectations for a ruling against the ECB are low. Still, a negative ruling would be a shock to the market and prevent the ECB from going full steam ahead with its €750b Pandemic Emergency Purchase Programme, which removes many limits that constrained its previous asset purchase programs.” NAB reported.

TECHNICAL OVERVIEW

The Euro fell 70 pips to close at 1.0900 on Monday. After rallying over 2% last week, all eyes this week, which is linked with one data point and an event.

Last week bulls have managed to push the common currency to the key resistance zone spread between 1.1000-1.1045. Most experts feel that EURUSD to appreciate in the coming months.

The return of USD weakness, which should allow Euro to perform better. We forecast a bullish target at 1.0990 ahead of the ECB meeting, and the price ran through the target we set.

Now looking at the technical chart, the Euro has reliable support between 1.0830 and 1.0800 below here 1.0770, and 1.0720 exists. Until the Euro stays above the support at 1.0720, it can be approached with a bullish bias (rebound only). Below the support, 1.0675 and 1.0630-1.0600 are the next destinations. We are going to trade between 1.0770-1.1100 ahead of this week’s data points.


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