The trading week began alarmingly: the main currency pairs opened trading with a substantial gap, responding to recent events. The euro-dollar pair tested the 14th figure for the first time since January last year, the yen paired with the dollar reached the middle of the 101st figure, and the aussie collapsed to record lows, dropping to around 0.6313. The US currency has mostly regained its position by the start of the European session, but still remains vulnerable. The sword of Damocles in the form of another round of Federal Reserve rate cuts looms over the greenback, exerting significant pressure. The coronavirus continues to carry out subversive work, covering more and more new horizons.
COVID-19 provoked not only easing of monetary policy in Australia, the US and some other countries - but also unleashed a trade war in the oil market. Black gold prices fell to multi-year lows on Monday - for example, a barrel of Brent brand is currently trading at 32 dollars, and WTI at 29. The price war began with the fact that Moscow did not support the initiative of Saudi Arabia to further reduce oil production - Russia announced that the corresponding obligations expire on April 1. Riyadh took countermeasures in response: first, the Saudis promised to increase the production of black gold in April by more than 2 million barrels per day. Secondly, Saudi Arabia announced the most significant oil discounts in the last twenty years to potential buyers on the foreign market. Since all these events took place on the weekend, the oil market collapsed on Monday. By the way, the collapse in prices became the worst since the beginning of Operation Desert Storm in 1991. The commodity market only fueled panic among traders in the foreign exchange market.
The economic calendar of the current trading week is not saturated. Only two main events can be noted - this is the release of data on the growth of US inflation and the March meeting of the ECB. The Chinese data may also have a certain impact on the pair: inflation indicators will also be published in China. But despite the importance of the above events, they will play a secondary role for EUR/USD. The news flow associated with the spread of coronavirus will be the main catalyst for the growth or decline of the pair. This news flow is clearly not in favor of the dollar.
To date, more than a hundred countries of the world are covered by coronavirus. According to WHO, the number of cases of infection in the world has increased to 110,034. At the same time, over the past day, 3,610 new infected and 71 deaths have been recorded. At the same time, the first five sad ratings look like this: China (80 699), South Korea (7 314), Iran (6 566), Italy (5 883) and Germany (951).
In the United States, more than 500 people are already infected. According to the latest data released by CNN, the total number of deaths of the disease reached 21. Of these, 18 deaths were recorded in Washington, two in Florida and one in California. Two states have declared a state of emergency.
In turn, economists continue to calculate possible losses from the epidemic. So, according to experts surveyed by Bloomberg, the global economy could lose up to $2.7 trillion. Analysts voiced four scenarios. In the event of the most negative (that is, a pandemic), global GDP growth will be 1.2% (before the Bloomberg virus predicted growth by 3.1%), and the eurozone and Japan will face a recession. The US economy will also significantly decline (with a high probability of a recession), while unemployment will increase in the country.
That is why regular reports on the rate of distribution of COVID-19 provoke such a strong volatility in the EUR/USD pair. In addition, do not forget that some Fed members (in particular, Bullard and Kaplan) associated this factor with the likelihood of a further rate cut. The market is currently discussing a scenario in which the Fed will lower the interest rate by 25 basis points at the March meeting and another 25 at the April or June meetings. A tougher option involves reducing the rate immediately by 50 points this month.
And here it is worth considering that the Fed is freer in its maneuvers than the ECB, whose base rates are already in the negative area. At the same time, it is possible that Christine Lagarde will allow the easing of monetary policy at the March meeting - in any case, its rhetoric will be extremely soft and pessimistic. This fact may put pressure on the euro. Nevertheless, the dovish results of the ECB meeting will not be able to turn the pair 180 degrees. After a temporary price pullback, the pair will still go up, as the Fed will most likely resort to more aggressive measures than the ECB.
Recession in US inflation will put additional pressure on the dollar. Preliminary data for February will be released on Wednesday. According to forecasts, the general consumer price index will show negative dynamics: on a monthly basis, it will slow down to zero, and on an annualized basis - to 2.2%. Core inflation should reach the level of January - in both monthly and annual terms.
But macroeconomic reports will play a secondary role this week. The dynamics of the spread of coronavirus, as well as comments by Fed representatives, will become the main catalyst for the price movement of the EUR/USD. For bulls of the pair, it is important to gain a foothold above 1.1375: in this case, the Ichimoku indicator will generate a bullish Parade of Lines signal on the weekly chart. This will allow buyers to settle in the 14th figure, and subsequently discover new price horizons.
The material has been provided by InstaForex Company - www.instaforex.com