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Euro Strikes Balance as Vaccine Hopes Offset by European Covid Spread

Euro Strikes Balance as Vaccine Hopes Offset by European Covid Spread

James Stanley, Senior Strategist

Technical Forecast for EUR/USD: Neutral

  • A quick flare of risk-on showed around the US open on Monday.
  • The big driver was early results from Pfizer’s vaccine trial, indicating a > 90% efficacy rate.
  • Covid continues to surge through Europe, triggering lockdowns that are sure to depress economic data. The big question is whether the ECB can roll out a bazooka large enough to offset the economic pain.
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This week started with a bang as news of Pfizer’s ongoing drug trial showed some pretty positive preliminary results. Reports indicated that efficacy was above 90%, which would be astounding and potentially promising. The study isn’t yet over and results are still incoming; but with a minimum efficacy level of 50% for approval, the 90% rate being touted painted a fairly positive picture.

This led to a springboard-like move in risk assets as both the DAX and the CAC40 put in outsized bullish moves. In US equities, however, that theme was a bit more divergent as the Dow put in a strong move while the S&P traded more cautiously; and the Nasdaq 100 actually fell on the news.

Dow Sets Fresh All-Time-High, Briefly

Of the three major US equity indices, the Dow has been the laggard so far in 2020 trade. While the Nasdaq dropped by 32.05% from the Feb highs to the March lows, and the S&P 500 gave back 35.7% - the Dow Jones Industrial Average sold off by a whopping 38.4%.

But, the lag wasn’t relegated to the sell-off; as the reversal was similarly more robust in the Nasdaq and the S&P with the tech-heavy index gaining as much as 88% while the S&P put in more modest 64.68% jump. The Dow was relegated to a peak-gain of 60% and, until this Monday was the only index of the three to not push up to a fresh all-time high.

But when markets opened on Monday that mattered little – and buyers drove the Dow up to that fresh high before starting to pull back, exposing an elongated wick above both the prior high and the 30k level. The S&P’s bullish response was a bit more subdued – and the response in the Nasdaq was actually bearish as the index gave back value on both Monday and Tuesday, creating a curious situation in which the high-flying Nasdaq stayed on its back foot while the Dow Jones Industrial Average attempted to play a bit of catch-up.

What makes matters really interesting here is the fact that this recent deviation would make sense if only the Dow’s composition were the same as it was a few months ago: It was in August when Pfizer was removed from the index; and perhaps there were some program trades that hadn’t yet been updated that could explain this robust move in the previously-lagging DJIA, but outside of that there appears to be little explanation for that divergence and this is of interest for those attempting to gauge the continuation potential of this recent risk-on move.

Dow Jones Daily Price Chart

Dow Jones Chart

Chart prepared by James Stanley; Dow Jones (DJIA) on Tradingview

Euro Snaps Back into Range After Fresh Monthly High

In the prior week with the US election garnering much of the attention, EUR/USD had put in a fairly strong outing with five consecutive days of gains. That was looking ripe for continuation on Monday morning as this Covid vaccine news was getting priced in, and EUR/USD pushed up to a fresh monthly high as the US session opened.

But this was short-lived: Prices in EUR/USD quickly reversed and built a bearish engulfing pattern for Monday’s session. That weakness continued on Wednesday with a minor bounce holding through Thursday and Friday.

On a bigger picture basis, drawing back to early-September trade, EUR/USD has built into quite the range, with support around the 1.1600 level and resistance around the 1.1900 handle.

EUR/USD Eight-Hour Price Chart

EURUSD Chart

Chart prepared by James Stanley; EUR/USD on Tradingview

European Pressure Points

Covid has already set hold for the second wave throughout Europe; and some of the numbers being reported in areas like Italy do not look very positive. Much of the continent has moved into varying stages of shutdown in an effort to control the spread, and the hope is that those mitigation efforts are beginning to show the initial stages of promise: But it’s still very early.

What we do know is that the continent is going to need some greater assistance from the European Central Bank, and the ECB has even begun to open the door to additional stimulus in December. This is something that could weigh on the single currency; and for EUR/USD – this could be a very key item as current political dynamics in the US do not look as though a large stimulus bill will be on the horizon for the world’s largest national economy.

But, at this point, EUR/USD remains in a range and as such, the technical forecast for the pair will be set to neutral for the week ahead. If we do see USD weakness stall or, perhaps even reverse, this could open the door for a deeper bearish move in EUR/USD as the ECB initiates a larger stimulus response in effort of offsetting lockdown-fueled economic losses.

--- Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX

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

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