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EUR/USD rallies on what could be the start of a major reversal

  • EUR/USD rallies as the US dollar gets taken down by the Fed’s surprise cut to zero ahead of schedule.
  • Market to find relief that the dollar liquidity will be abundant, USD to be pressured on QE. 
  • EUR could find territory back towards 1.15 handle. 

EUR/USD has spiked in the open on Monday in Asia following news that the Federal Reserve has slashed rates to zero as part of a coordinated effort between a number of central banks to enhance the provision of liquidity via standing USD liquidity swap line arrangements. EUR/USD is currently trading at 1.1186 having rallied from 1.1065 to 1.1193 the highs, +80%.

EUR/USD has made a foundation in the 1.1060s on the news and can be expected to hold in higher grounds should the market find relief that the dollar liquidity will be abundant and that the central bankers will ensure it. The move is a proactive measure to ensure, unlike in 2008, that there will not be a funding crisis. Then again, the US dollar also has its safe-haven qualities and the Europeans are at the epicentre of the coronavirus, so fundamentally, the carry trade unwind appeal of the euro may not have too much life left in it. 

European finance ministers to meet

The euro’s fate could lie more heavily on what is happening domestically. For instance, on Monday, the European finance ministers are due to meet after the European Central Bank let the financial markets down by declining to cut interest rates as part of a stimulus package announced last week. This is discussed in a more in-depth analysis of the situation, here: What you need to know for markets opening: Europe on lock-down, risk-off firmly back on the agenda

Worryingly, however, Europe’s finance ministers do not have the best reputation following how poorly the debt crisis was managed so, there is little faith that they can protect their economies from the worst pandemic in more than 100 years.

QE could keep the dollar lower

In the coming months, as the Washington Post highlighted, “the Fed will purchase at least $700 billion more in bonds as part of its new quantitative easing. The majority of that, at least $500 billion, will be US Treasury bonds. The rest will be mortgage-backed securities.”

The article, released at the open on Asia FX, explained also that the ultra low-interest rates are expected to remain until the U.S. economy recovers from the coronavirus downturn. “The [Fed] expects to maintain this target range until it is confident that the economy has weathered recent events,” the central bank wrote in a statement released Sunday evening.

Should the market take the view that there is no need to hurry into the dollar on fears of shortfalls, and accompanied with QE, the dollar could be on the back-foot for a while longer which opens risk back towards h 1.15 March highs. 

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