EUR/USD Forecast: Why European coronavirus has been euro-positive and where it may end

Coronavirus is contagious, spreading around Europe – yet EUR/USD has been edging higher. The direction of travel is what is moving the currency pair rather than short and long-term interest rates. 

The common currency has been benefiting from record low yields on US treasuries, with ten-year benchmark bonds returning 1.306, an all-time low. Demand for safe-haven American debt has pushed yields lower, making the greenback less attractive. So far, currency traders have been ignoring the fall in European yields, with the safe-haven German ten-year bunds returning a negative -0.50% – yet this is only the lowest since October. 

Bond markets are reflecting cuts in short-term interest rates, with the European Central Bank now set to cut 25 basis points by year-end and the Federal Reserve to slash borrowing costs twice. While the Federal Funds Rate is at 1.50% to 1.75% and the ECB's deposit rate at -0.50%, the greater potential for monetary easing in the US is weighing on the dollar.

Will this trend change? 

It is essential to note that the economic direction of travel has been considerably different – favorable to the dollar. The world's largest economy grew by an annualized rate of 2.1% in the fourth quarter, while Germany stagnated. Recent economic figures such as the Conference Board's Consumer Confidence gauge for February have been upbeat. Eurozone figures continue showing contraction. 

Circling back to the recent moves, coronavirus has now reached Germany, in addition to Austria and mainland Spain. That may further undermine economic activity. The European epicenter remains northern Italy – the eurozone's third-largest economy's industrial heartland – where the death toll has reached double digits. 

Reports from additional countries may weigh on the euro. The moves may be exacerbated if governments decide to enact lockdowns in order to contain the disease or if additional companies take measures. Lufthansa, a large German airline, has announced a package of cost cuts. Other firms may follow.

The US calendar features only New Home Sales, leaving coronavirus headlines and resulting market swings to rock markets.

EUR/USD Technical Analysis

Euro/dollar has posted higher highs and higher lows – a bullish sign. It is also benefiting from upside momentum on the four-hour chart. However, it has failed to break above the 100 Simple Moving Average.

All in all, the picture is mixed.

Support awaits at the recent low of 1.0860 which also capped the currency pair earlier this month. It is followed by 1.0810, a stepping stone on the way up. The 2020 low of 1.0777 is next.

Resistance is at 1.0890, which separated ranges in mid-February, is the daily high, and also where the 100 SMA meets the price. Next, lines from early February await EUR/USD" 1.0925, 1.0940, and 1.0965.