EUR/USD Forecast: Coronavirus gives, coronavirus takes away, downtrend resistance looms

  • EUR/USD has been retreating from the highs amid concerns about the coronavirus.
  • Manufacturing PMIs and further headlines about the virus are set to dominate trading.
  • Monday's four-hour chart is painting a mixed picture.

China has issued an urgent appeal for protective equipment amid the coronavirus outbreak – but traders are taking a break from running to the safety of US treasuries. Higher US bond yields are pushing the dollar higher, allowing it to recover from Friday's sell-off.

The outbreak continues gripping headlines. The respiratory disease has already taken the lives of around 360 people and more than 17,000 have been infected. The first fatality has been recorded out of China while new testing equipment and medication is applied. 

The economic impact is becoming more severe. Airlines are canceling flights to the mainland and several Chinese provinces have extended their New Year holidays. Financial markets have reopened in the world's second-largest economy with a significant downfall. Shanghai closed 8% lower despite efforts by the People's Bank of China's stabilization efforts. The PBOC cut interest rates on reserve repo operations and also took other measures.

While China was catching up with last week's equity rout, stocks Europe is stable and S&P futures are pointing higher. Investors seem to be picking bargains on shares while taking profit on American bonds, allowing the greenback to recover.

Beyond the coronavirus

The euro has its own issues to grapple with. Luis de Guidos, Vice President of the European Central Bank, said that inflation will likely remain at low levels for some time. Markit's final Manufacturing Purchasing Managers' Indexes for January confirmed the initial read. The industry continues contracting, albeit at a slower pace than in late 2019.

The focus later shifts to the US ISM Manufacturing PMI. Similar to Europe, the industrial sector continues struggling while consumers are driving the economy forward. A small improvement is on the cards for January, yet the indicator is set to remain below 50 points – reflecting contraction. 

See US Manufacturing PMI Preview: Trade takes back seat to the virus

US politics may also be of interest late in the day. The Democratic Party holds its first round of primaries in Iowa. Bernie Sanders, a firebrand US Senator, and Joe Biden, the centrist former Vice President, are in the lead.

While this is the first contest, the complex caucus system and the small size of the state may result in little market reaction. The race is long and set to end only in June. Nevertheless, investors prefer Biden's mainstream approach to the economy rather than Sanders' socialist ideas. 

Overall, the coronavirus and also US data are set to dominate. 

EUR/USD Technical Analysis

EUR USD Technical Analysis February 3 2020

Euro/dollar is trading below a downtrend resistance line that is set to converge with Friday's high of 1.1095. Other indicators are mixed. The currency pair enjoys upside momentum on the four-hour chart and trades above the 50 Simple Moving Average. However, it has fallen below the 100 and 200 SMAs.

EUR/USD is battling 1.1065, which was a stubborn support line in December. Next, 1.1040 capped it during January and is also where the 50 SMA hits the price. 1.1020 and 1.0990 are next.

Some resistance awaits at 1.1075, a support line from January, and then 1.1095, Friday's high. It is followed by 1.1120 and 1.1145. 

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