EUR/USD Forecast: Levels to watch as markets panic amid increasing coronavirus fears

How low can US yields go? The crash in returns on US debt is weighing heavily on the dollar and pushing EUR/USD to new highs – even though one of the largest sources of worry comes from the eurozone's third-largest economy.

Bond markets are pricing a sharp reduction of interest rates – 75 basis points – by the Federal Reserve in its scheduled meeting next week. The bank slashed borrowing costs by 50bp last week, in an extraordinary session. The benchmark ten-year yield dropped below 0.50%, and the whole yield curve fell under 1%. 

Italy has decreed the lockdown of vast areas in the north of the country, including Milan, the country's second-largest city, and the country's industrial heartland. While reports suggest that the severe restrictions are not thoroughly followed, paralyzing the lives of 16 million people – a quarter of the population – is weighing heavily on markets. Rome said that the death toll jumped from 233 to 366 on Sunday, with over 7,000 cases. 

Italy – whose economy was stagnating before the crisis – will likely suffer a recession, and other countries in the eurozone will likely follow. Nevertheless, the Fed has more room to cut than the European Central Bank. The Frankfurt-based institution convenes this week and may announce a new stimulus. However, the ECB's deposit rate stands at -0.50%, and its bond-buying scheme is at €20 billion per month – leaving it little room to act. 

Investors are also worried about the spread of the disease in the US, where a lack of test kits for the respiratory illness is raising fears of a widespread outbreak. So far, 554 infections and 21 deaths have been confirmed in the US. President Donald Trump attended a conference alongside a person that was later confirmed positive for coronavirus. However, that person was probably far from the president. Senator Ted Cruz shook hands with a person that was later diagnosed with the disease – and the senator is now in quarantine. 

Oil, stocks, also have their say

The spectacular crash in oil prices is also dampening the mood and exacerbating the rush into US debt, and thus pushing euro/dollar higher. Saudi Arabia has decided to cut prices and to ramp up production – aiming to raise its market share to price out US shale producers. The dramatic decision comes on the backdrop of failed talks with Russia on Friday.

The Middle-Eastern Kingdom wanted to extend and deepen the pact to cut oil production in the wake of the coronavirus crisis while Russia was reluctant to act. WTI fell below $42 on Friday and has tumbled below $30 early on Monday. 

Stock markets are falling worldwide, with European shares opening with their worst falls since the financial crisis. US futures are pointing to falls of 5%.

While coronavirus-related developments are hogging the headlines, it is still worth noting several economic figures. The US labor was doing well in February with an increase of 273,000 jobs, better than expected. German industrial output rebounded in January with a rise of 3% after substantial falls beforehand. 

The Sentix Investor Sentiment for March is set to turn negative, reflecting pessimism among investors after expressing optimism in February. 

Overall, coronavirus headlines, ranging from the number of cases, measures to halt the disease, and moves in correlated assets such as yields are set to euro/dollar. 

EUR/USD Technical Analysis

In the wake of the dramatic moves, the daily chart is more useful than the four-hour graph. The Relative Strength Index is above 70 – indicating overbought conditions. While the RSI implies a correction, these are abnormal days. EUR/UDS is trading above the 50, 100, and 200-day Simple Moving Averages, and momentum is to the upside. 

Resistance awaits at 1.1450, which was a peak in March. It is followed by 1.1495, the daily high, but more importantly, by 1.1520, a high point in January 2019. Next, we find 1.1575 and 1.1620.

Some support awaits at 1.1410, which was the high point in June 2019. IT is followed by 1.1285, a stubborn cap from July, and by 1.1240, which held it down in December, followed by 1.1160, a cap from January 2020.