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EUR – how low can it go?

Another rip higher by the U.S. dollar overnight against the Euro as economic data neatly highlighted the contrasting outlook between the U.S. and the Euro area economies.

In Europe, the German ZEW sentiment survey was notable for a fall in both the forward-looking expectations index and the current conditions index and in stark contrast to a stronger than expected rebound in the U.S. Empire manufacturing index.

While the levels of the ZEW survey remain above those seen during the nadir of the U.S. – China trade war last year, it does reinforce a belief that the Euro area is more exposed to the Covid-19 China slowdown than the insular U.S. economy. It is also a key reason why downside momentum in the EURUSD has strengthened in recent weeks, in line with the increased media coverage and awareness of the Covid-19 virus.

However, as noted yesterday, the slowdown in the growth of total infected coronavirus cases has been faster than expected. U.S. investment bank Morgan Stanley is forecasting the number of confirmed cases to peak in the first week of March, earlier than anticipated. A possible clue that the EURUSD’s may be approaching a short term low.

Elsewhere, positioning data from the CFTC shows EURUSD short positions are not overstretched by any means, although sentiment data reveals that the number of futures traders bullish the EURUSD is approaching extreme lows.

From a technical perspective, the EURUSD is within touching distance of major downside support at 1.0750ish coming from the 2019 trend channel. It can also be observed the RSI indicator, currently at 23.4 is oversold and at its lowest reading since May 2018.

Putting all of these factors together, I think the EURUSD in coming sessions will test and commence a countertrend rally from the support 1.0750 area. Keeping in mind, that the EURUSD’s status as a negative-yielding currency is likely to see sellers emerge on bounces to 1.0880/1.0920.

EUR – how low can it go?

Source Tradingview. The figures stated areas of the 19th of February 2020. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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