EUR/USD Forecast: Three reasons for the rise and two for why it may end soon

• EUR/USD is surging to three-week highs amid coronavirus-related USD weakness. 
• The Fed is set to cut rates while the ECB is hesitating.
• Friday's four-hour chart is pointing to overbought conditions.

Coronavirus carnage – The massive stock sell-off has extended as the disease spreads over the world. The US has ramped up its tests, more companies and forecasters are expressing concerns, and additional countries have reported cases – including in Nigeria.

The spread to sub-Saharan Africa raises concerns about an acceleration in infections as these countries' health systems are considered less effective. Overall, the relentless news flow is overwhelming the world.

EUR/USD is mostly moving on news related to the respiratory disease, and here is what is moving it up:

1) Fed cut coming

Investors are moving away from stocks and into the safety of bonds. At the time of writing, US ten-year Treasuries are yielding 1.16%, a record low. The short end of the curve is implying an imminent rate cut in March – a dramatic change that is weighing heavily on the dollar. Bond markets previews priced reducing borrowing costs only in September. 

The greenback has come under immense pressure across the board. 

2) ECB unwilling and unable to act

Christine Lagarde, President of the European Central Bank, seemed to rule out immediate monetary stimulus in a conversation with the Financial Times on Thursday. And while Vitas Vasiliauskas, a member of the ECB, said that the Governing Council could meet in an extraordinary matter, he admitted there is little room for action.

The ECB has a negative deposit rate of -0.50% while the Fed Funds Rate is at a range between 1.50% to 1.75%. The ECB has very little room to cut. 

3) German fiscal stimulus

The old continent's largest economy is taking baby steps toward unleashing its spending potential. Investors are paying money to lend funds to the German government. Olaf Scholz, the country's finance minister, has suggested suspending the debt brake to allow regions to extend their spending and stimulate the economy. He ran into opposition within Chancellor Angela Merkel's CDU, but Berlin's baby steps are also supporting the euro.

If Germany spends – on battling coronavirus, infrastructure, or green projects – the ECB would be relieved of doing more. 

However, EUR/USD may run into issues

1) Economic divergence favors the dollar

The German economy has stagnated in the fourth quarter and the whole eurozone grew by only 0.1% or 0.4% annualized. For comparison,

US growth was confirmed at 2.1%. Other indicators are also pointing to a substantial economic advantage for the US. Once the dust settles, these gaps may come into play.

2) EUR/USD is overbought

The Relative Strength Index on the four-hour chart is pointing to overbought conditions – implying a potential drop, at least in the short term. The RSI is well above 70. 

Other indicators such as momentum and the Simple Moving Averages are pointing higher. 

Resistance awaits at 1.1065, 1.11, 1.1120, 1.1145, and 1.1175. All were resistance lines on the way down in January. 

Support awaits at 1.1020, 1.0980, 1.0940, 1.0925, and 1.080.