EUR/USD Daily Forecast – Euro Underpinned by Flight from Risk Assets

Investor sentiment has shifted dramatically since late-day trading on Friday as worries over the Coronavirus have grown. The Japanese yen and Swiss franc, known as safe-haven currencies, are catching a strong bid. Meanwhile, the high-yielding Australian and New Zealand dollar have been sold off aggressively.

The euro is viewed as a funding currency for high-yield or risk trades, and as such, is well supported in the early week, despite the momentum-driven decline last week following the ECB meeting.

Reuters reported that 106 people have been killed by the new virus as of Tuesday, up from 81 people on Monday. The head of the World Health Organization was reported to have confidence in China’s ability to contain the virus.

The downside momentum in the equity markets, and the rally in precious metals, have subsided since the initial reaction on Monday. However, volatility is expected to remain elevated in the week ahead as the Federal Reserve meets tomorrow. As well, most of the popular names in the equity markets will be reporting earnings this week which should keep traders on their toes.

Spanish jobs data, released shortly after the European open today, came in better than expected with the unemployment rate declining to 13.8%. Later in the North American session, the latest US durable goods orders report will be released.

Technical Analysis

With the downside momentum in EUR/USD slowing, there is some potential for a bounce higher. Although at this stage, there has not been any technical evidence of a recovery.

Support is in play from the lower bound of a declining trend channel that has encompassed price action in the week thus far. There is a horizontal level at 1.1025 that can be used to gauge near-term price action. A cross above it might be indicative of a recovery.

In the event the pair tries to push higher, an important resistance confluence resides at 1.1072. The horizontal level intersects with a rising trendline that originates from the October low.

To the downside, support comes into play from the psychological 1.1000 level. A horizontal level at 1.0991 is seen slightly below it.

Bottom Line

• The downside momentum in EUR/USD that followed last week’s ECB meeting has subsided, creating the potential for a bounce.
• Support in the session ahead is found at 1.0991 while resistance is seen at 1.1072.