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Euro Soars to Next Breakout Point as Dollar Sinks on Fed Easing Bets

Euro Soars to Next Breakout Point as Dollar Sinks on Fed Easing Bets

Daniel Dubrovsky, Strategist

Euro, EUR/USD, Japanese Yen, US Dollar, Coronavirus, Fed – Asia Pacific Market Open

  • Euro soars in best day in over 2 years as Fed rate cut bets weakened the US Dollar
  • Coronavirus fears sank the S&P 500 as California reported cases being monitored
  • EUR/USD on the brink of critical upside breakout that may shift the technical bias

Euro and Japanese Yen Gain as US Dollar Sinks on Aggressive Dovish Fed Expectations

The Euro, Japanese Yen and Swiss Franc were some of the best-performing major currencies on Thursday as coronavirus contagion fears continued to eat away at global growth prospects. Both the S&P 500 and Dow Jones declined 4.42% in their worst single-day performance in over two years. If these hold on to their declines tomorrow, it will be the worst week on Wall Street since August 2011 as equities face lows from early 2018.

During the Wall Street trading session, Gavin Newsom – the Governor of California – noted that the state is monitoring 8.4k patients for the Wuhan virus. The economy of California is the largest within the United States which poses a downside risk for the nation if it slows due to measures to prevent the virus from spreading. The timing of the extended selloff in stocks aligned closely with the announcement.

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Unsurprisingly, the markets are aggressively doubling down on prospects of a dovish Federal Reserve. Odds of a 25-bp rate cut from the Fed is almost fully priced in for next month. By the end of this year, the markets are anticipating 3 reductions in benchmark lending rates. Prospects of the US Dollar losing its relatively high yield worked against it on Thursday despite its status as the world’s reserve currency.

Here the anti-risk Japanese Yen stood tall alongside the similarly-behaving Swiss Franc. Earlier in the session, ECB President Christine Lagarde said that the virus is not yet at the stage of requiring a response. A combination of these fundamental developments likely led to EUR/USD rallying an impressive 1.09% which was the best performance since January 2018. The Canadian Dollar fell alongside “pro-risk” crude oil prices.

Friday’s Asia Pacific Trading Session – Coronavirus, Japanese Yen, Australian Dollar

S&P 500 futures are mixed heading into Friday’s trading session as risk trend will likely remain the prominent driver for currencies. New cases of the coronavirus in South Korea could extend the selloff in regional bourses, leading to drops in the Nikkei 225 and ASX 200. That may bode well for the Yen and could boost the Euro against the US Dollar if the latter continues being damaged by falling yield expectations. The pro-risk Australian Dollar will also be closely watching sentiment along with local private sector credit data.

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Euro Technical Analysis

EUR/USD has also been heading higher in the wake of bullish signals in trader positioning bets – as expected. The near-term technical bias arguably shifted bullish after prices close above falling resistance from the beginning of this month on February 21.

Yet, now comes the test of medium-term falling resistance from the end of 2019. Prices have stopped at this key juncture along with the psychological barrier between 1.0981 to 1.1003. If these hold, the EUR/USD technical outlook may still favor the downside. Otherwise, a daily close higher exposes 1.1095.

EUR/USD BEARISH
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of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 14% 7% 10%
Weekly 17% -21% -6%
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EUR/USD Daily Chart

Euro Soars to Next Breakout Point as Dollar Sinks on Fed Easing Bets

Chart Created Using TradingView

--- Written by Daniel Dubrovsky, Currency Analyst for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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