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EURUSD Window For Another Leg Higher

Liquidity has become the key issue now as markets, particularly equities, have collapsed in an unprecedented manner last week – intraday volatility remains extremely high (S&P500 futures have already registered a ~4% range, as an example). Some regulatory bodies are starting to ban short selling of equities, while central banks continue to provide liquidity to the markets, including the ECB and Fed yesterday, while the Norwegian Central Bank this morning cut rates to 1%. The Bloomberg USD index broke the 15-month range highs, but has backed off from its peak. As such, markets are likely to remain very skittish today, watching headlines, with FX reacting to the bond and stock markets. 

Further central bank action over the weekend, in an attempt to shield economies from the effects of Covid-19, dominate the headlines today. The US Fed slashed interest rates by 100bp, taking rates to 0.0-0.25%, along with the announcement that it would restart QE asset purchases by buying $ 500bn of Treasuries and $ 200bn of mortgage-backed securities. The move followed a 75bp cut by the RBNZ and a number of central banks lowering the price of US dollar swap lines to improve liquidity in the market. Despite these actions, US and Asian equity markets sold off heavily. As a measure of economic damage that the virus is having, Chinese data was much weaker than expected, retail sales (-20.5%), industrial production (-13.5%) and fixed asset investment (-24.5%) on a year-to-date basis and the first time all three have seen contractions at the same time. 

The coming week’s focus will remain on what further monetary policy stimulus will be forthcoming, but more importantly what the fiscal response will be to the deepening coronavirus crisis. Reports suggest that US and European authorities are preparing for more fiscal stimulus. In the US, it remains to be seen how quickly the Trump administration and Congress can agree measures, with both the timing and the size of the package being important. In Europe, meanwhile, there are reports that the German government may be prepared to ditch its longstanding balanced budget strategy to combat coronavirus. At the European level, officials have said the EU will do “whatever is necessary” and allow maximum flexibility in fiscal rules to enable governments to provide support for the economy. Later today, G7 leaders will hold a video conference to discuss the spread of the virus, while finance ministers from Eurozone countries will meet to discuss plans to support their respective economies

From a technical & trading perspective the EURUSD has witnessed a sharp pull back since its early March highs. Price has retreated to test symmetry swing support & the 61.8%Fibonacci retracement level as discussed in the Weekly Market Outlook. As buyers defend these levels a close above the near term Volume Weighted Average Price would set a base with the potential to retest early March highs towards 1.115 en route to an equidistant swing objective sighted at 1.1766. A close sub 1.060 would negate the bullish thesis and open a retest of the mid 1.07 area en-route to the pivot point cluster targets towards 1.05, setting up a USDJPY reversal pattern.

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