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EUR/USD Rate Tracks Monthly Range Even as ECB Warns of 20% Contraction

EUR/USD Rate Tracks Monthly Range Even as ECB Warns of 20% Contraction

David Song, Strategist

EUR/USD Rate Talking Points

EUR/USD consolidates following the failed attempt to test the monthly high (1.1039), and the exchange rate may face range bound conditions ahead of the European Council meeting on April 23 as finance ministers representing the European Union (EU) agree on a EUR 540B stimulus package.

EUR/USD Rate Tracks Monthly Range Even as ECB Warns of 20% Contraction

EUR/USD appears to be stuck in a narrow range as the European Council pledges to “work on a roadmap and an action plan to ensure the well-being of all Europeans,” and the unprecedented response may heighten the appeal of the Euro as European Council President Charles Michel emphasizes the “absolute necessity to develop a massive investment strategy.

It remains to be seen if a major announcement will be made over the coming days as Mr. Michel states that “our goal is to open a strategic discussion in order to see how it is possible to deal together to take some very strong decisions,” and the economic shock from COVID-19 may put pressure on the European Central Bank (ECB) to further support the monetary union as Vice-President Luis de Guindos warns that “calculations point to a contraction in the second quarter by as much as 20% compared with the previous quarter.”

Mr. Guindos went onto say that “it will be hard for the recovery in the second half of 2020 and 2021 to make up for this year’s downturn” amid the ongoing lockdowns across Europe,” and the ECB may continue to push monetary policy into uncharted territory as the Governing Council “stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.”

In turn, the ECB may continue to endorse a dovish forward guidance at its next meeting on April 30, but President Christine Lagarde and Co. may merely attempt to buy time as the central bank carries out the Pandemic Emergency Purchase Programme (PEPP).

With that said, EUR/USD may continue to consolidate within the March range as European officials attempt to deliver a comprehensive stimulus package that would cushion the Euro area, and the exchange rate may carve a more defined range over the coming days as the advance from the monthly low (1.0768) stalls ahead of the April high (1.1039).

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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 was 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).
  • EUR/USD may continue to consolidate within the March range amid the failed attempt to test the yearly low (1.0636), with the lack of momentum to close below the 1.0780 (100% expansion) region pushing the exchange rate back towards the Fibonacci overlap around 1.0950 (100% expansion) to 1.0980 (78.6% retracement).
  • Nevertheless, EUR/USD may carve a more defined range over the days ahead as the advance from earlier this month fails to produce a test of the April high (1.1039), with a break/close below the 1.0830 (78.6% expansion) to 1.0860 (23.6% retracement) region bringing the 1.0780 (100% expansion) area back on the radar as it largely lines up with the monthly low (1.0763).
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--- 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.