• EUR/USD has been advancing amid hopes for an imminent Fed rate cut but the ECB may follow.
  • Coronavirus fears are set to dominate trading, with PMIs also eyed.
  • Monday's four-hour chart is showing overbought conditions.

The doctor is on its way and the patient is already feeling better – that is the feeling in financial markets as the Federal Reserve made an extraordinary statement hinting at cutting rates. The Fed's statement – accompanied by a similar one from the Bank of Japan and the Bank of England – has turned around the market 

Expectations for the Federal Reserve to cut interest rates have pushed US yields lower and the greenback dropped sharply. EUR/USD is benefiting from this USD weakness. However, this may come back to hit the pair.

Here are three reasons for a potential drop:

1) ECB reaction

Three major central banks have changed their minds from monitoring the situation to pledging emergency measures. After the Fed, BOJ, and BOE, can the European Central Bank continue sitting on its hands? 

Christine Lagarde, president of the ECB, has been reluctant to act as she has limited space – the bank's deposit rate is already at -0.50%. Moreover, she wants governments to step up their game and open their purse strings – especially Germany. Nevertheless, the Frankfurt-based institution will want to be seen as doing its part.

If Lagarde or her colleagues make a similar commitment, the euro may react. It may be in the form of more QE rather than cutting rates. In any case, that would weigh on the common currency.

2) Coronavirus remains scary, safe-haven flows abound

The respiratory disease has already taken the lives of over 3,000 people worldwide and the number of infections is nearing 100,000. Italy, the epicenter of the outbreak in Europe, has reported over 4,000 infections and more than 20 deaths. The disease has spread to Berlin and Brussels. 

The economic damage is also broadening, as events are canceled and big gatherings were forbidden. France disallows events of over 5,000 people and has shut down Paris' famous Louvre museum. 

While final eurozone Purchasing Managers' Indexes have remained stable, those from China were devastating. Both the official and non-official PMIs have hit record lows –worse than the 2008 crisis. Markets are awaiting the ISM Manufacturing PMI due out at 15:00 GMT. 

See Manufacturing PMI Preview: IS this what is meant by going viral?

With fears still running high – including in Europe – it is hard to see how the euro extends its gains.

3) Overbought conditions

EUR USD Technical Analysis March 2 2020 four hour

The Relative Strength Index on the four-hour chart is well above the 70 mark – indicating overbought conditions. That implies a snap back to lower levels. Other indicators such as momentum are positive while the pair trades above the 50, 100, and 200 Simple Moving Averages.

Resistance awaits at the round number of 1.11, which held EUR/USD down in early February. It is followed by 1.1120, which served as a cap in January. Next, 1.1170 is the upside target.

Support is at 1.1050, a swing high from Friday. It is followed by a temporary cap of 1.1010 and the ephemeral support line of 1.0980 also seen late last week. Next, the swing low of 1.0950 is next.

 

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