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Euro Outlook: Covid-19 Second Wave to Weigh on EUR/JPY, EUR/USD

Euro Outlook: Covid-19 Second Wave to Weigh on EUR/JPY, EUR/USD

Daniel Moss, Analyst

Euro Price Outlook, EUR/JPY, EUR/USD, Covid-19 Second Wave, European Central Bank – Talking Points:

  • Risk appetite faded throughout APAC trade as investors digested the tightening of coronavirus restrictions in several European nations.
  • The Euro may struggle to move higher as rising infections intensify the need for additional support from the ECB.
  • EUR/USD struggling to break key chart resistance.
  • EUR/JPY coiling up above moving average support. Is a breakout in the offing?
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Asia-Pacific Recap

Risk appetite notably faded during Asia-Pacific trade as market participants digested a record surge of coronavirus infections in the US and throughout Europe.

The haven-associated US Dollar rose while the cyclically-sensitive Australian, Norwegian and Canadian Dollars sank against their major counterparts.

Gold slipped back below $1,900/oz and silver plunged almost 2%, despite yields on US 10-year Treasuries sliding 2 basis points lower.

Australia’s ASX 200 and Japan’s Nikkei 225 index dipped marginally lower, while China’s A50 index plunged over 2% after a fresh outbreak of asymptomatic Covid-19 cases rattled regional sentiment.

Looking ahead, Germany’s IFO Business Climate Index release for October headlines the economic docket alongside US new homes sales for September.

Euro Outlook: Covid-19 Second Wave to Weigh on EUR/JPY, EUR/USD

DailyFX Economic Calendar

Tightening Covid-19 Restrictions to Hamper Euro

The resurgence of the coronavirus in several European nations is threatening to upend the trading bloc’s nascent economic recovery and may hamper the performance of the growth-sensitive Euro.

Italy has introduced its strictest restrictive measures since emerging from a nation-wide lockdown in May, after recording a record 21,273 daily Covid-19 infections, while Spanish Prime Minister Pedro Sanchez announced a national curfew as the 7-day moving average of cases surges past 12,000.

German Chancellor Angela Merkel and the mayors of Germany’s 11 largest cities agreed to introduce new restrictions for those municipalities deemed by the government as having a “high concentration” of infections, and France registered over 50,000 new daily cases as local health authorities declared that 70% of intensive-care beds in the Paris region are taken up by coronavirus sufferers.

Euro Outlook: Covid-19 Second Wave to Weigh on EUR/JPY, EUR/USD

Source – Worldometer

This staggering surge in cases is likely to heap pressure on the European Central Bank to do more to support the regional economy, as high-frequency and economic data begins to show the negative impact of restrictions.

Euro-zone services PMI fell to 46.2 in October, undershooting market expectations of 47, while all three mobility metrics – walking, driving and transit – continue to slide lower after peaking in early September.

To that end, ongoing coronavirus developments will likely dictate the Euro’s trajectory ahead of the ECB’s monetary policy meeting on October 29, with the tightening of restrictions probably intensifying the need for additional monetary support and in turn capping the upside of the region’s currency.

Euro Outlook: Covid-19 Second Wave to Weigh on EUR/JPY, EUR/USD

Source – Apple Mobility Data

EUR/USD Daily Chart – Psychological Resistance May Inspire Pullback

The outlook for the EUR/USD exchange rate remains skewed to the downside, as price struggles to break above the August 6 daily close (1.1876) and the RSI fails to clamber above 60 and into bullish territory.

However, with the MACD indicator tracking firmly above its neutral midpoint and price travelling above all four moving averages, an extended slide lower seems relatively unlikely.

Nevertheless, a short-term pullback could be on the cards if resistance at the monthly high (1.1881) remains intact, with a daily close below confluent support at the September 8 daily close (1.1774) and 3-week uptrend needed to carve a path to test the 38.2% Fibonacci (1.1626).

On the other hand, a daily close above the psychologically imposing 1.1900 mark would probably inspire a push to test the yearly high set on September 1 (1.2011).

Euro Outlook: Covid-19 Second Wave to Weigh on EUR/JPY, EUR/USD

EUR/USD daily chart created using TradingView

EUR/USD IG Client Sentiment Report

Retail trader data shows 25.46% of traders are net-long with the ratio of traders short to long at 2.93 to 1. The number of traders net-long is 9.67% higher than yesterday and 33.69% lower from last week, while the number of traders net-short is 4.15% higher than yesterday and 26.35% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD trading bias.

Euro Outlook: Covid-19 Second Wave to Weigh on EUR/JPY, EUR/USD

EUR/JPY Daily Chart – Coiling Up Ahead of ECB?

Although EUR/JPY rates appear to be travelling within the confines of an Ascending Channel, an extension of the fall from the yearly high (127.07) could be in the making, as price fails to breach psychological resistance at the 125 mark.

A daily close below confluent support at the 100-DMA (123.30) and uptrend extending from the September low (122.38) may ignite a more extensive correction and bring the sentiment-defining 200-DMA (122.27) into focus.

Conversely, a break back above the June high (124.43) may encourage would-be buyers and generate a push to test the 125.00 level, with a daily close above the October high (125.08) needed to carve a path towards the August 6 swing-high (125.59).

Euro Outlook: Covid-19 Second Wave to Weigh on EUR/JPY, EUR/USD

EUR/JPY daily chart created using TradingView

EUR/JPY IG Client Sentiment Report

Retail trader data shows 42.88% of traders are net-long with the ratio of traders short to long at 1.33 to 1. The number of traders net-long is 10.82% higher than yesterday and 41.42% lower from last week, while the number of traders net-short is 10.00% higher than yesterday and 4.60% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/JPY prices may continue to rise.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/JPY trading bias.

Euro Outlook: Covid-19 Second Wave to Weigh on EUR/JPY, EUR/USD

-- Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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