EUR/USD Forecast: Dead cat bounce over? Darkening coronavirus clouds imply fresh falls

"We are at war" – said French President Emmanuel Macron, when he presented new restrictions in an attempt to the coronavirus outbreak, while President Donald Trump also warned of a recession. EUR/USD is holding onto its range – in a typical "dead cat bounce" move – but that may change. 

France is shutting down Tuesday on at midday. Non-essential activities are being prohibited – to various degrees – across the old continent, with Germany closing bars, theaters, and museums, and Spain requisitioning the private health system. Italy, the epicenter of the European outbreak, continues recording hundreds of deaths on a daily basis. Several countries are also closing borders, with the EU recommending restricting entries and exits from the EU. 

These steps already have an economic impact on airlines asking for government help and car factories shutting down in several places. Moreover, many firms state they are unable to provide forecasts. 

The upside is that European countries are moving towards injecting fiscal stimulus, with France leading the way. Macron offered a broad €300 billion package to support businesses and announced the waiving of utility bills during the emergency period.

Governments are backed by the European Central Bank, with President Christine Lagarde vowing support. Will additional countries, most importantly Germany, join France? Massive spending from governments may boost the euro, but so far, Europe is moving relatively slowly. 

The German ZEW Economic Sentiment for March may shed some light on how European businesses see the current situation. 

See German ZEW Preview: Three reasons why low expectations are too optimistic, lose-lose for EUR/USD

Trump's tone change

On the other side of the Atlantic, Trump has changed his tone, unwilling to deny the US is suffering a recession and saying that the peak of the crisis may come only in the summer. The administration recommended prohibiting gatherings of more than ten people as states and cities have announced additional restrictions. 

Trump's warnings sent US stocks plunging late on Monday, with major indexes falling by double-digits – in the worst fall since 1987. The greenback gained as bond yields dropped and as financial distress sent investors fleeing to the safety of the US dollar, albeit at a lesser extent than last week.

The Federal Reserve's shock stimulus late on Sunday helped cushion some of the pressure with its cut of interest rates to 0%, the announcement of $700 billion of Quantitative Easing, and dollar swaps with five central banks. 

The focus shifts to the government response. Democrats have floated a stimulus package worth some $750 billion, comparable in size to the 2009 stimulus package. Deliberations continue on Capitol Hill. 

US Retail Sales figures – usually a top-tier figure – are due out later but traders may see it as "old news" as it related to February, before the outbreak intensified. Nevertheless, it provides a look at consumers before recent developments.

See US Retail Sales February Preview: Old news or a forecast?

Coronavirus headlines are set to continue rocking markets. According to the Johns Hopkins University, 182,000 infections have been confirmed worldwide with deaths topping 7,000. In Italy, which is under lockdown for over a week, mortalities have exceeded 2,000. In the US, fewer than 5,000 have been reported but testing is lagging behind.

Apart from health updates, policy responses are of high interest, most importantly, fiscal stimulus. 

EUR/USD Technical Analysis

Euro/dollar is trading around the 100 Simple Moving Average on the four-hour chart, above the 200 SMA and below the 50 SMA. Momentum is to the downside while the Relative Strength Index is balanced. All in all, bears are in the lead.

Support awaits at 1.11, which provided support in early March. It is followed by 1.1050, a stubborn support line from last week. The next lines are 1.0950 and 1.0875. 

Resistance is at 1.1240, a swing high on Monday which is backed up by the 200 SMA. It is followed by 1.1320 and 1.1360, both stepping tones on the way down. 1.1410 and 1.1495 are next.

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