EURUSD: Fundamentals present downside risk


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By: Andria Pichidi

European stock markets have moved broadly higher overlooking the February composite PMI readings for the Eurozone and the UK which  looked robust. However, the first signs of supply chain disruptions were already evident in February even in Europe. Whether demand will be impacted short term, or more lastingly dented, but a supply crisis could actually drive up prices, rather than depress them. Eurozone and German retail sales also recovered in January, while December numbers were revised higher.

Hopes that the ECB and the BoE will follow the Fed’s 50 bp emergency rate cut yesterday are keeping bonds underpinned despite the economic data outcomes, although stocks are struggling as the Fed’s surprise cut also sparked concerns that the economic situation is worse than feared. US futures are posting gains in the region of 1.9%-2.1%, although that seems to be less of a reaction to the Fed’s rate cut, but the Super Tuesday election results in the US. Market narratives have ascribed the rally in overnight US equity futures to the success of former vice president Joe Biden in the Democratic Party’s “Super Tuesday” primary elections, which has made him the odds-on favourite to be the Democrats nomination for president, overtaking Bernie Saunders, who is evidently deemed to be less market friendly than the moderate Biden.

The ECB meeting next week will clearly see intense discussions, although as of yesterday it seemed that officials want to focus on alternative measures, including another targeted loan program to address, what will likely turn into a supply crisis.

Hence as stock markets rallied and data releases were largely overlooked, we have seen GER30 struggling to break through 23.6% Fibonacci resistance level from February plummet. 

Meanwhile, EURUSD fell back to the 1.1150 area after printing a 2-month peak at 1.1213. The Dollar, after sliding for much of the last 2 weeks, a primary benefit of which has been the Euro, looks to have found a toehold after dipping to fresh lows in the immediate wake of the Fed’s 50 bp emergency rate cut yesterday. Such a move had been fully discounted in the Fed funds futures market, but at the March-18th FOMC rather than yesterday’s between-meetings move.

The narrow trade-weighted USD index (DXY) posted a post-Fed two-month low at 96.98 before lifting to around 97.35 in what is shaping up to be the first up-day the dollar index has seen since February 20th. The 10-year US T-note yield advantage over the 10-year Bund has dropped from around 200 bp to around 160 bp in little more than two weeks. This has driven the shift higher in EURUSD, which had in February been trading at 34-month lows.

EURUSD gains do not expected to be a one-way street, view recent gains as a rotation higher rather than a trend following move. Given the negative yields and apparent exposure to the coronavirus in the Eurozone (Italy ranking as the number 2 country with the most reported cases of COVID-19 outside of China), coming at a time with German growth sputtering as demand for its exports dives.

As the same time, the US Treasury market remains a top safe haven for global capital (being liquid, safe and positively yielding). Markets will continue to monitor the relative impact of the coronavirus, and efforts to contain it, between the US and Eurozone.

From the technical perspective meanwhile, we can identify few prime signs of an exhaustion since 20 February incline. Momentum indicators nearterm and medium term provide similar signs of a potential pullback. In the daily chart, the RSI has turned below 40, Stochastics holds above 80 however it has formed a rounding top as it slopes lower. Contrary, MACD is mixed with lines above neutral but signal line cofnigurating into the negative area.

This signs cannot yet imply to a switch of the positive outlook for EURUSD, unless the asset hit 50-day EMA at the round 1.1000 level .

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