EUR/USD Daily Forecast – Euro Recovers After Sharp Drop Induced by Panic in Select Euro Bond Markets

The European Central Bank met on Thursday and introduced fresh easing measures to help the economy stave off the negative impacts of the Coronavirus.

The bank will spend an additional 120 billion euros in bond purchases out of which a majority will flow to corporations. While the markets had been pricing in a 10 basis point cut, the ECB did not reduce interest rates.

Several media outlets have taken the view that Lagarde’s approach is opposite to Mario Draghi’s, her predecessor. Draghi became well known for the statement “we will do whatever it takes” that he made early in his tenure as ECB President. Lagarde may well be known for the statement she made yesterday that the bank is “not here to close spreads”.

The comment was in sharp contrast to Draghi’s reassuring statement, and worried investors that the ECB won’t stand behind government bond issues. This triggered a sharp sell-off in bonds for economies that are currently viewed as risky.

With Italy showing the largest number of Coronavirus cases, their bonds sold off the most aggressively. Since the bonds are denominated in euro’s, investors usually convert their proceeds into another currency, such as the dollar, putting pressure on the EUR/USD exchange rate.

Lagarde clarified her statement in an interview with CNBC following the meeting and the downside pressure has dissipated since then.

Technical Analysis

EUR/USD has recovered a bulk of yesterday’s loss but remains below resistance at 1.1225. This level was responsible for terminating the recovery rally that lasted throughout the fourth quarter and is considered significant.

A push above resistance is likely to encourage bulls and stands to set the tone over the near-term.

Downside support for the pair is seen at 1.1146 which reflects the lowest close on a 4-hour chart this week. A sustained drop below it could lead to a bearish continuation.

Bottom Line

• Panicked bond investors triggered a sell-off in EUR/USD based on comments from Lagarde yesterday. Lagarde clarified her statement and the exchange rate has since recovered.
• Resistance at 1.1225 comes into play in the session ahead. While below it, the pair is at risk of a bearish continuation.