Wednesday, February 19, 2020

Will the euro be able to recover any losses this week?

Tags
  • Dollar
  • Euro
  • European Central Bank
  • Federal Reserve
  • FOMC minutes

02192020a_ta

Analysts’ Pick: Will the euro be able to recover any losses this week?

  • EUR/USD is expected to continue its downtrend towards 1.0760’s level
  • The coronavirus outbreak looks likely to weigh on the EU’s outlook and manufacturing PMI survey that’s set to release on Friday

It's likely to be another busy week for the EUR/USD pair as meeting minutes from both the Fed (3am GMT +8) and ECB (8.30pm GMT +8) are set to be released on Thursday. But while we don't expect the ECB's meeting minutes to move the euro, traders will likely be reactive should the Fed's minutes deviate from Fed Chair Jerome Powell's semi-annual monetary policy report that he presented to Congress last week. For the euro, PMI data that's set to be released on Friday at 4.30pm (GMT +8) is more likely to be in focus.

We expect the Fed's minutes to reiterate Powell's comments at his testimony before last week. The greenback is unlikely to be driven by the minutes as a result. The meeting minutes will likely signal that interest rates will stay low for a prolonged period while officials will probably be optimistic of the US economy thanks to strong economic data since the easing of trade tensions between the US and China earlier this year. Downside risks that the Fed will focus on will be the ongoing coronavirus outbreak in China which probably will only reinforce the Fed's stance to put monetary policy changes on hold as the actual economic impact of the virus remains unknown. The market has likely already priced in the above with Fed fund futures indicating that the market only priced in a 9.3% probability for a rate cut for the Fed's monetary policy meeting in March. The dollar is unlikely to have large movements as a result.

Financial markets expect a low likelihood of a rate cut in the first half of 2020

02192020b_ta

An overly optimistic ECB meeting minutes may put more pressure on the euro, especially as the ECB's last monetary policy meeting was on January 23rd when the number of cases of the coronavirus was only at 653. Traders will likely be focused on two areas in the document. First, any additional details to the ongoing framework review and second, hints to how the ECB will react in an adverse environment. During the last meeting, the ECB sounded more optimistic, likely as business sentiment in the bloc was improving and the bloc's overall economy signalling a probable bottoming out. With the coronavirus outbreak weighing heavily on manufacturers as suppliers are concentrated in Chinese cities that has the highest rate of infections, traders will likely be focused on the ECB's possible reactions especially as ZEW's economic sentiment survey for Germany already widely missed estimates of 21.5 to sharply decline to 8.7 in February.

Business sentiment in the EU and Germany sharply declined after improving the past quarter

02192020c_ta

Probabilities of a change in monetary policy for the meeting in March has been relatively flat

02192020d_ta

The euro will likely face downward pressure on Friday as manufacturing PMI in the EU will probably be lower than expected. February's flash PMI survey by Markit is expected to not have sustained its improving trend from late last year. The outbreak of the coronavirus has already impacted sentiment in the EU and the PMI survey will also probably reflect that. With supply chains and global demand likely to be disrupted by the outbreak, business sentiment within industries are likely to be affected as a result. Coupled with escalating trade tensions with the US, we expect the manufacturing sector to be the most affected, with the Eurozone's flash manufacturing PMI index possibly falling to 46.7 in February.

Improving PMI in the last quarter is unlikely to be sustained thanks to the Covid-19 outbreak

 

02192020e_ta

With little upside for the euro for the rest of the week, EUR/USD is likely to continue falling towards 1.0760’s level by the end of the week as a result of weaker PMI data that will highlight the economic impact of the virus outbreak on manufacturers in Europe. Overly-optimistic outlooks from the ECB may also pressure the euro. EUR/USD should fall past 1.0791's level to range between 1.0760 and 1.0791 as a result.

Technical Analysis:         

EUR/USD

RSI shows EUR/USD continues to trade at an oversold level for an extended period of time. But fundamentally, the euro is still skewed towards the downside and bears will likely take advantage of this, and try to push past the initially support level at 1.0791. If bears manage to break the first support level, then bulls are unlikely to be able to keep the euro nearer to the 23.6% trend-based Fibonacci extension level. The euro is then likely to continue its downward momentum in the short-term, especially as the EU’s economy may find it difficult to maintain its recovery amid the coronavirus outbreak weighing on global demand and supply chains.

Support: 1.0791 / 1.0760 / 1.0740

Resistance: 1.0827 / 1.0856 / 1.0882

EUR/USD Chart (H4)

02192020f_ta