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EUR/USD Rate Recovery Stalls as ECB Warns of Looming Recession

EUR/USD Rate Recovery Stalls as ECB Warns of Looming Recession

David Song, Strategist

EUR/USD Rate Talking Points

EUR/USD pares the advance from the yearly low (1.0636) as the European Central Bank (ECB) warns of a looming recession, and the exchange rate may consolidate over the coming days as it snaps the series of higher highs and lows from the previous week.

EUR/USD Rate Recovery Stalls as ECB Warns of Looming Recession

EUR/USD struggles to hold its ground as the ECB Vice President Luis de Guindos states that incoming data “indicate that a recession will take hold,” with the official going onto say that “each month will see a fall of approximately two percentage points in GDP” amid the lockdown in Europe.

In turn, Mr. Guindos insists that the ECB “will do everything possible to keep the euro together and to provide the best funding possible,” and it seems as though the Governing Council will keep the door open to implement more non-standard measures as the central bank remains reluctant to remains reluctant to push the main refinance rate, the benchmark for borrowing costs, into negative territory.

Image of ECB interest rate decisions

It remains to be seen if the ECB will continue to utilize its balance sheet to combat the weakening outlook for growth as the Governing Council launches the Pandemic Emergency Purchase Programme (PEPP), and the central bank may call upon European authorities to support the monetary union as “there are proposals to use the European Stability Mechanism or the European Investment Bank.”

Nevertheless, it seems as though the ECB will continue to endorse a dovish forward guidance as President Christine Lagardeemphasizes that the Governing Council is “fully prepared to increase the size of our asset purchase programmes and adjust their composition, by as much as necessary and for as long as needed,” and the unprecedented response may continue to produce headwinds for the Euro as the central bank pushes monetary policy into uncharted territory.

As a result, EUR/USD volatility may continue to pick up in 2020, and the US Dollar may outperform its European counterpart as the greenback benefits from the flight to safety.

With that said, the recent rebound in EUR/USD may prove to be short lived, and the exchange rate may exhibit a more bearish behavior over the coming days as it snaps the series of higher highs and lows from the previous week.

Sign up and join DailyFX Currency Strategist David Song LIVE for an opportunity to discuss key themes and potential trade setups surrounding foreign exchange markets.

EUR/USD Rate Daily Chart

Image of 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 slipped to a fresh 2020 low (1.0636).
  • Nevertheless, the recent rebound in EUR/USD appears to have stalled amid the string of failed attempt to close above the 1.1140 (78.6% expansion) region, and the exchange rate may exhibit a bearish behavior over the coming days as it snaps the series of higher highs and lows from the previous week.
  • Lack of momentum to hold above 1.1040 (61.8% expansion) may push EUR/USD back towards the Fibonacci overlap around 1.0950 (100% expansion) to 1.0980 (78.6% retracement), with the next region of interest coming in around1.0830 (78.6% expansion) to 1.0860 (23.6% retracement).

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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