EUR/USD Rebounds as Fed Plans to Purchase CMBS But Will It Last?

EUR/USD Rate Talking Points

EUR/USD consolidates as the Federal Reserve ramps up its effort to support the US economy, but the exchange rate may continue to give back the advance from the 2017 low (1.0340) as the US Dollar benefits from the flight to safety.

EUR/USD Rebounds as Fed Plans to Purchase CMBS But Will It Last?

EUR/USD bounces back from a fresh yearly low (1.0636) as the Federal Open Market Committee (FOMC) announces three new credit facilities along with plans to purchase commercial mortgage-backed securities (CMBS) to combat the economic shock generate by the coronavirus.

At the same time, the FOMC appears to be on track to unveil more measures as the central bank “expects to announce soon the establishment of a Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses.”

It remains to be seen if other major central banks will follow suit as International Monetary Fund Managing (IMF) Director Kristalina Georgieva warns of a global slowdown in 2020, with the group anticipating “a recession at least as bad as during the global financial crisis or worse.”

The supply/demand shock may force major central banks to implement more non-standard measures as interest rates sit near zero, but the extraordinary measures may do little to curb the flight to safety amid the growing number of COVID-19 cases.

In turn, the US Dollar may continue to benefit from the current environment as the IMF states that “investors have already removed US$83 billion from emerging markets since the beginning of the crisis, the largest capital outflow ever recorded,” and the recent rebound in EUR/USD may prove to be short lived as market participants scale back their appetite for risk.

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EUR/USD Rate Daily Chart

Source: Trading View

• Keep in mind, the monthly opening range has been a key dynamic for EUR/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 1, with the high for November occurring during the first full week of the month, while the low for December happened on the first day of the month.
• The opening range for 2020 showed a similar scenario as EUR/USD marked the high of the month on January 2, with the exchange rate carving the February high during the first trading day of the month.
• However, the opening range for March has become less relevant amid the pickup in volatility, with the pullback from the yearly high (1.1495) producing a break of the February low (1.0778) as the exchange rate slips to a fresh 2020 low (1.0636).
• The break/close below the 1.0780 (100% expansion) region opens but the Fibonacci overlap around 1.0560 (100% expansion) to 1.0600 (161.8% expansion), but the exchange rate may stage a larger rebound as the Relative Strength Index (RSI) struggles to push below 30 and reverses course ahead of oversold territory.
• A close above 1.0780 (100% expansion) may spur a move towards the 1.0830 (78.6% expansion) to 1.0860 (23.6% retracement) region, with the next area of interest coming in around 1.0950 (100% expansion) to 1.0980 (78.6% retracement).

--- Written by David Song, Currency Strategist

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