• EURUSD’s last week rally was second-best in Q1 2020.
  • The common currency still more than 15% off 2018 highs.

The market sentiment was improved over this last week led by the ECB and Fed announced packages. All the central banks except Risks bank in G10 space has chopped the rates in March 2020 to limit the downside risk. The business cycle is turned down, and it’s time for traders to be aware of the gravity of the situation during the Covid crisis.

Q1 scoreboard: A review of Q1 2020 when volatility escalated, supported by the deep recession fears which could contract the economies significantly (GDP) across the globe, especially China, Europe, and the US.

  • Jordi Gali, a Senior Researcher at the Center for Research in International Economics (CREI), Professor at Universitat Pompeu Fabra and a CEPR Research Fellow, said, “A direct loss of GDP is thus unavoidable, given the path of action required to contain the spread of the virus. And if prolonged by more than one or two months, it is bound to result in a cumulative loss of output similar to or larger than that experienced during the last financial crisis”.

What a difference three months make? Inverted V-formation to V- formation.

After an outperformance in the final three months of 2019, we have expected a range trading in Q1 2020, whereas the stage was set for a big move, unfortunately down. The USD rebounded from a weak end to 2019 against EUR to post significant gains till mid-February 2020. Since then, volatility was extreme, as the virus failed to be contained within China.

The spreading of the coronavirus is a severe economic shock to the world and euro area economies. Last week’s Flash EZ and UK PMI surveys revealed the COVID-19 outbreak leads to the largest collapse in business activity ever recorded. Flash EZ Manufacturing PMI printed at 44.8 its 92-month low vs 49.2 in February. And, EZ Services PMI collapses to 28.4 a record low since 1998 vs 52.6 in February.

  • Chris Williamson, Chief Business Economist at IHS Markit said, “The March PMI is indicative of GDP slumping at a quarterly rate of around 2%, and clearly there’s scope for the downturn to intensify further as even more draconian policies to deal with the virus are potentially implemented in coming months.”

Zooming in to observe the last three weeks’ situation, it was a perfect storm. A sharp up move was printed between 20 Feb to Mach 09, followed by a nosedive to 1.0640 levels. Finally, a V-formation shaped pattern pushed the price to 1.1140 levels. The dollar underperformance after a significant run, month-end, and Quarter-end are the key factors that led the recent bounce.

Now US virus counts reached 148K, which has surpassed Italy and China, according to Johns Hopkins University (JHU). The dollar index has erased 50% of the previous week’s gains. Sentiment change among G10 in the past week was significant.

  • Daragh Maher and Clyde Wardle at HSBC said, “Data showing an accelerating number of COVID-19 cases in the US, with the number now exceeding China’s, may also have contributed to USD weakness. Any sense that the US economy could be hit more than other countries could undermine the USD’s role as a safe haven. Nonetheless, March has also shown that the mood around the USD can swing markedly, and we suspect the retreat simply reflects the exaggerated earlier rally.”.
  •  Moody’s Analytics revised growth forecast downward for 2020. In its Global Macro outlook 2020-21 the American credit rating agency said, “We have revised our growth forecasts downward for 2020 as the rising economic costs of the coronavirus shock and the policy responses to combat the downturn are becoming clearer. We now expect G-20 real GDP to contract by 0.5% in 2020, followed by a pickup to 3.2% growth in 2021. In November last year, before the emergence of the coronavirus, we were expecting G-20 economies to grow by 2.6% in 2020.

Central bank policy

During the Covid-19 crisis, the ECB and Fed announced packages to limit the downside risk. In response to the Covbid-19 emergency ECB monetary policy has three elements.

  1. Additional LTROs– longer-term refinancing operations to provide immediate liquidity support to banks and to safeguard money market conditions.
  2. TLTROs-Targeted longer-term refinancing operations to -0.75% to support the continued access of firms and households to bank credit in the face of disruptions and temporary funding shortages associated with the coronavirus outbreak.
  3. Asset Purchase Program (APP)- An increase of an envelope of an extra EUR 120 billion over the rest of 2020.

APP- The ECB’s Governing Council announced a new Pandemic Emergency Purchase Programme with an injection of €870 billion- this amounts to 7.3% of euro area GDP. (A new Pandemic Emergency Purchase Programme with an envelope of €750 billion until the end of the year, in addition to the €120 billion to its APP).

“We are making available up to €3 trillion in liquidity through our refinancing operations, including at the lowest interest rate we have ever offered, -0.75%.” ECB reported.

Looking forward- The lower oil prices will be the most bullish factor to the euro in the near to medium term.

The last three weeks of March 2020 were the worst weeks for the currencies since the GFC. The last few days of euro bounce is not erasing our wave C target of 1.0550 in the coming weeks to months.

Lower oil prices and the dollar retreat are the key two factors that would propel the momentum towards mild bullish in the week ahead. The key support is placed at 1.0950, followed by 1.0880 and 1.0770 levels. If the price starts moving further higher, key resistance levels to watch out for are 1.1060 and 1.1100 above here focus on 1.1180 and 1.1240 levels.

We will get a taste of week data this week when we see the CPI and PMI readings. The oil lower prices would drag inflation numbers significantly.

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

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