EUR/USD Daily Forecast – Will the ECB Decouple the Euro From It’s Inverse Equity Correlation?

The Euro rapidly rose to levels not seen in more than a year at the open this week but has eased lower to pare gains and to close the weekly gap. The session ahead might see EUR/USD holding within a range, ahead of tomorrow’s ECB meeting.

ECB President Lagarde has warned of the dangers the Coronvirus can have on the economy and has expressed the desire to take action. Most analysts, however, think there is little the central bank can do as its interest rate is already in negative territory.

While the ECB rarely talks about the exchange rate these days, the rapidly rising euro is not making the bank’s job any easier. The rise in the euro has been so unusual that it has had some pondering whether the single currency has become a safe-haven currency.

EUR/USD does appear to have a strong inverse correlation with the equity markets. Both instruments turned at the same time in late February and both have seen similar momentum since.

I personally don’t think the euro has turned into a safe-haven. Rather, I think the currency is being faced with an urgency by short-sellers to cover their positions in the wake of a drastic shift in risk sentiment. Further, with the Fed cutting rates, the “carry trade appeal”, associated with the euro for several years now, has diminished.

The ECB will have an opportunity to shift the market’s perception of the euro, and potentially decouple EUR/USD from its inverse correlation with the equity markets. But as most analysts have suggested, they are not in a position to do much with the interest rate and will probably need to be very creative at their meeting tomorrow.

Aside from the upcoming ECB meeting, traders will also be keeping an eye out for further developments in the United States. President Trump has hit a roadblock in pushing through fiscal stimulus but is expected to continue his efforts for a payroll tax cut.

Technical Analysis

Ahead of Thursday’s ECB meeting, I expect EUR/USD might fall into a range as traders await the results of the meeting.

To the downside, the 1.1285 level offers support as it reflects Friday’s close. EUR/USD has already rallied from the level after closing the gap from this week’s open in late trading yesterday.

A decline below this support level can lead to a test of a horizontal level at 1.1225 which is a major level that triggered a reversal in the recovery that took place during the fourth quarter.

To the upside, resistance is seen at 1.1370 for the session ahead.

Bottom Line

• EUR/USD may fall into a range as traders await the outcome of Thursday’s ECB meeting.
• The gap from this week’s open has been closed although a recovery following the gap close was brief.
• Updates on US fiscal stimulus efforts can have a volatile impact on the exchange rate in the session ahead.