COVID pandemic crisis continues to tail financial markets with downside surprises for both European PMIs and US non-farm payrolls last week. Despite that, risk sentiment appears to be stabilizing with benchmark indices across the globe, recovering after having a deep dive in March.

The return of USD weakness should allow G10 FX to perform better. 

Most G10 currencies rose on Monday (except EUR and GBP) as a number of newly discovered COVID cases continued to decline daily. Coronavirus in Spain, France, and Italy has already peaked, according to Nordea Markets. Now the focus is only on the US and UK.

Turning to our subject currency EUR, it was another volatile week with the price falling across the board after posting massive gains the previous week. The common currency was generally weaker last week, falling 2.20% against USD and 2.70% against CAD, whereas it was little down against CHF by 0.20% and 0.80% against JPY. The EUR is developing a medium-term bottom against the risk-sentiment currency JPY.

Are the traders waiting for Coronabond? Would the ECB consider Eurobonds in the form of “coronabonds”?

Over the past few weeks, the outlook for the euro area economy deteriorated sharply as countries had to intensify containment measures, dampening both production and consumption. This posed downside risks to the inflation outlook in the euro area.

Euro bonds or Coronabonds:  Isabel Schnabel ECB board member told the Sunday To Vima in an interview with Angelos Athanasopoulos said, “The issuance of one-off “coronabonds” is one possibility. There are other instruments that could be used, like an EU rescue fund or measures involving the ESM or the European Investment Bank”.

Data review: Euro area annual inflation down to 0.7% and Eurozone manufacturing contracts sharply in March.

  • Euro area annual inflation is expected to be 0.7% in March 2020, down from 1.2% in February according to a flash estimate from Eurostat.
  • Eurozone Manufacturing PMI registered below the 50.0 no-change marks for a fourteenth successive month and fell considerably from February’s one year high of 49.2 to 44.5 in March, according to the IHS Markit.

 Data preview: This week, the focus is on Tuesday’s Eurogroup meeting. Euro bonds or Coronabonds are the key driver for the EUR in the coming days. Data side is relatively quiet.

ING said, “This week the focus is on whether Europe is ready to help the likes of Italy and Spain with a collective response – e.g., a Coronabond – or is merely ready to compound debt sustainability problems by lending them more money.”

TECHNICAL OVERVIEW

This week’s Eurogroup action critical for the EUR. Last week the price retraced back to 78.6% fib reaction, which coincides with the parallel support located at 1.0770 levels. Now we expect a range trading action until the lockdowns are in place in Italy and Spain. Once the dust settles, we prefer to take long EURCHF along with the EURUSD.

The price has been making lower lows and lower highs formation for six sessions. The parallel support comes at 1.0770 below here focus on 1.0730 and 1.0690 levels. If the price reacted to the coronabonds, key resistance levels to watch out for are 1.0900 and 1.0970-1.1030 levels. Any rallies to resistances attract selling interest. As we highlighted last week, we still stick to our 1.0550 targets in the coming days. Most buyers and sellers are taking a wait and see attitude, although many are anticipating lower prices.

 We are going to trade between 1.0770-1.0880 ahead of today’s Eurogroup meeting. For bears sell ONLY below 1.0765.

For bulls take long as long as Monday’s low is the support.  

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

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