EUR/USD Forecast: Wall Street's trading halt and a potential move from Merkel may open door to 1.15

Spectacular crash – is no exaggeration when trading at Wall Street is halted due to falls of 7% on all major indexes. Coronavirus is spreading and so are fears of the severe economic fallout. Investors are rotating out of stocks and into bonds. In turn, US ten-year yields have plummeted to new historic lows below 0.50%. The whole American yield curve is now below 1%.

This crash in returns on US long term borrowing is weighing heavily on the dollar, pushing EUR/USD close to 1.15 – even though the most worrying developments come from Italy. The eurozone's third-largest economy has reported 7,375 cases and 366 deaths. Rome took the drastic step of locking down 16 million people – a quarter of the population – in the industrial heartland in the north.

In the US, the number of cases climbed to 566 with 22 mortalities. While the Federal Reserve cut rates and will probably do more – rates may reach zero by the summer – the government is seemingly moving slowly. Contrary to most European countries and the draconian Chinese limits, life continues mostly as usual in the US. One of the standouts is the cancelation of the South By South West festival (SXSW) in Austin. 

And when the US takes more action – potentially by discouraging travel – the greenback may further fall. PIMCO, a global investment management firm, now foresees and outright the US recession.

Merkel's leadership matters

The eurozone may also enter a recession, but the common currency is rising partly due to the inability of the European Central Bank to act. Contrary to the Fed's 1-1.25% interest rate range, the ECB's deposit rate is at -0.50% – deep in negative territory. Further reductions may cause more pain to banks without help from the real economy.

The German government has room to lift the euro by opening its purse strings. German Chancellor Angela Merkel has said the government will provide high liquidity to companies. Is this the first step toward the fiscal stimulus that will push the euro higher? Or only a substitute that will weigh on the common currency? 

At this point, it is hard to tell and events are moving fast. France wants more spending and Italy has already ramped up expenditure due to its dire situation – receiving the nod from the EU. However, the key to further gains for the euro – regardless of the dollar – is Merkel taking advantage of the crisis to change policy. 

Overall, coronavirus headlines and policymakers' reaction are critical to the next moves.

EUR/USD Technical Analysis

Euro/dollar is at overbought territory on the daily chart – with the Relative Strength Index above 70. Will we see a correction? These are extraordinary days, and such conditions may continue for some time. Other indicators are positive, with momentum pointing up. The pair also trades above the 50, 100, and 200-day Simple Moving Averages.

Some resistance awaits at 1.1450, which capped EUR/USD in the spring of 2019. IT is followed by 1.1525 – above the 1.15 level – which was a high point in early 2019. The next levels are 1.575 and 1.1620. 

Support awaits at 1.1410, a high point from the summer of 2019, followed by 1.1350, a peak from the same time. More recent levels at 1.1240 and 1.1215 which date to recent months.