Forex News

Fears of second coronavirus wave could bode well for dollar

  • EUR/USD lacks clear directional bias amid renewed coronavirus fears. 
  • Germany sees a rise in the virus reproduction rate.
  • China’s PPI drops to multi-year lows, signaling continued weakness in the manufacturing sector. 
  • Risk-off is pushing the dollar higher and could cap the upside in EUR/USD.

While EUR/USD has recovered from Asian session lows and is trading on a flat note at press time, the prospects of the single currency scoring big gains during the European session look bleak due to renewed concerns over the coronavirus outbreak. 

The pair is currently trading largely unchanged on the day at 1.0805, having hit a low of 1.0784 early Tuesday. 

On Monday, German reported an above-1 reproduction rate of the coronavirus pathogen, indicating a resurgence in the virus outbreak just days after implementing steps to reopen the economy.

Meanwhile, Wuhan, the epicenter of the novel coronavirus outbreak in China, registered five new cases on Monday and South Korea warned of a second wave on Sunday.

As a result, markets have turned risk-averse, as evidenced by the 0.71% decline in the S&P 500 futures. The American dollar, therefore, is again drawing haven bids against the growth-linked currencies like the AUD and could score gains against the single currency. 

Other developments, too, favor an uptick in the dollar. For example, China’s factory-gate prices or Producer Price Index fell 3.1% from a year earlier in April, registering its sharpest decline in four years. The data indicate that with pressure mounting on the domestic and international economies, China’s manufacturers are unable to charge the price they would like for their products, according to South China Morning Post. 

Further, trade tension between the US and China and Australia and China are escalating. While some Chinese advisers have reportedly called for a renegotiation of the Phase 1 deal with the US, so far, President Trump has shown little interest in the matter. Meanwhile, China has decided to import ban on meat imports from Australia’s big four abattoirs. 

The tide, however, could turn in favor of the single currency if the US Consumer Price Index, scheduled for release at 12:30 GMT, prints well below estimates. That would reinforce investors’ expectations for negative interest rates in the US. 

Technical levels

 

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