EUR/USD Rate Talking Points
EUR/USD struggles to retain the rebound from the monthly low (1.0727) even though Italy plans to roll back the nationwide lockdown starting on May 4, and the Euro Area 1Q Gross Domestic Product (GDP) report may drag on the exchange rate as the update is anticipated to show the first contraction since 2013.
EUR/USD Rate Outlook Hinges on Euro Area 1Q GDP Report & ECB Meeting
EUR/USD eyes the yearly low (1.0636) as fresh data prints coming out of the Euro Area is anticipated to show the headline reading for inflation narrowing to 0.1% from 0.7% per annum in March, while the growth rate is expected to contract 3.3% after expanding 1.0% during the last three months of 2019.
The economic shock from COVID-19 may put pressure on the European Central Bank (ECB) to further support the monetary union as European Council President Charles Michel plans to make the EUR 540B stimulus package available by June, and it remains to be seen if the Governing Council will deploy more non-standard measures at the next meeting on April 30 as the central bank adopts “temporary measures to mitigate the effect on collateral availability of possible rating downgrades resulting from the economic fallout from the coronavirus (COVID-19) pandemic.
In turn, the ECB may continue to endorse a dovish forward guidance as President Christine Lagarde and Co. pledge to “take additional measures to further mitigate the impact of rating downgrades, particularly with a view to ensuring the smooth transmission of its monetary policy in all jurisdictions of the euro area,” and the Governing Council may further utilize its balance sheet to combat the weakening outlook for growth as the central bank remains reluctant to push the main refinance rate, the benchmark for borrowing costs, into negative territory.
As a result, the ECB may reiterate that 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,” and President Lagarde and Co. may continue to push monetary policy into uncharted territory 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.”
However, the ECB may merely attempt to buy time as the central bank carries out the Pandemic Emergency Purchase Programme (PEPP), and more of the same from the Governing Council may lead a limited reaction in EUR/USD as the unprecedented efforts taken by monetary as well as fiscal authorities instill hopes for a V-shaped recovery.
Nevertheless, the Euro may face a more bearish fate over the remainder of the month as EUR/USD preserves the series of lower highs and lows from the previous week, and the exchange rate may continue to give back the advance from the yearly low (1.0636) if the ECB prepares European households and businesses for additional monetary support.
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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 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).
- With that said, the recent rebound in EUR/USD may end up being short lived as the exchange rate preserves the series of lower highs and lows from the previous week, and lack of momentum to hold above the 1.0780 (100% expansion) region may open up the yearly low (1.0636), with the next area of interest coming in around 1.0570 (100% expansion) to 1.0600 (161.8% expansion).
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— Written by David Song, Currency Strategist
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