EUR/USD Forecast: Sell the rally? Without massive coordinated action, it's another debt crisis

In stock markets, it is already worse than 2008 – as fears that a systemic financial crisis will compound the coronavirus health crisis. US shares suffered the worst day since 1987, and several European bourses tumbled the most on record on Thursday's massive sell-off.

Investors staged a stampede into the dollar, selling everything else – regardless of yields. EUR/USD hit a low of 1.1050 before the Federal Reserve stepped in to inject $500 billion of liquidity and will do that again today.

Stocks are attempting recovery, and euro/dollar is topping 1.12 on Friday – but this may prove temporary. The departure from markets may continue without coordinated action. 

Europe beginning to move, but slowly

Starting from Europe, the European Central Bank expanded its bond-buying scheme by a total of 120 billion euros and with a new lending scheme to banks, with favorable rates. The Frankfurt-based institution was criticized for not cutting rates – yet its deposit rate is already at --0.50%, and further reductions may cause more pain for banks.

Christine Lagarde, President of the ECB, does deserve criticism for saying that it is not the bank's role to control bond spreads. Italy, the worst-hit European country, pledged €25 billion – the scale of the full EU special fund to deal with the crisis so far. The debt-stricken country's liabilities are set to leap, and without backing from the central bank, it's borrowing costs could do so as well. Italian bonds were sold off after Lagarde's unfortunate comment – and so was the euro. 

The ECB stepped up its calls for governments to act – and there are initial movements from the biggest countries. Angela Merkel said that extraordinary circumstances justify suspending the debt limit after stating that up to 70% of Germans may contract the virus. French President Emmanuel Macron addressed the nation with somber words, saying it is the worst epidemic of the 21st century and announcing the closure of schools.

A coordinated commitment by all countries, together with the central bank – is still needed. 

Otherwise, the run out of stocks will turn into a sell-off of government bonds in periphery countries – a re-run of the debt crisis and severe danger for the euro.

US – the Fed is alone

The Federal Reserve felt the need to intervene with half a trillion dollars of liquidity without early notice and will continue doing so – evidence of a potential systemic risk an imminent liquidity squeeze. Is that enough? Another move is coming today, and more cannot be ruled out.

However, the government is failing to create confidence. President Donald Trump sent a message of business as usual after his speech on Wednesday, where the absence of material fiscal stimulus weighed heavily on markets. Trump said that markets are still above his pre-election levels and seem to be mindless of taking measures to calm the public. 

More: Market crash, dollar surge, are only the beginning If leaders fail to act

In the meantime, New York City announced an emergency, most sports leagues canceled their games, and Disneyland shut its parks. The closure of Broadway and actor Tom Hanks' positive coronavirus news seem to make waves more than the president's words. 

The University of Michigan's preliminary Consumer Sentiment gauge for March may shed some light on the public's views on the situation. It is expected to fall from the highs above 100, but it is unclear by how much.

See Consumer Sentiment Preview: Where will consumers lead?

Democrats and Republicans are working on a relief package and reported progress, but until Congress presents the deal and Trump blesses it, markets will likely see only "dead cat bounces."

Overall, trading is centered on coronavirus developments – health updates and policy responses.

EUR/USD Technical Analysis

The Relative Strength Index on the four-hour chart is above 30, outside oversold conditions. The currency pair is trading above the 100 and 200 Simple Moving Averages but lost the 50 SMA. Momentum is to the downside.

All in all, bears are in the lead. 

Support awaits at 1.1150, the daily low, followed by the round number of 1.11, and 1.1050 is Thursday's swing low. 1.0950 and 1.0875 are next. 

Resistance is at 1.1220, the daily high, followed only by 1.1325, which held the pair down on Thursday. 1.1410 and 1.1495 are next.