EUR/USD Daily Forecast – Rally Extends to Fresh 8-Month High As US Rate Cut Expectations Rise

The markets are fully pricing in another rate cut at the Fed meeting scheduled in 12 days. Further, CME data shows the probability of a 50 basis point rate cut at the March meeting sitting at 44% shortly after the European open on Friday.

Increased panic over the Coronavirus has been the primary driver that has led the markets to price aggressive easing expectations. Earlier this week, the Federal Reserve delivered on these expectations with an emergency 50 basis point rate cut, ahead of its scheduled meeting. Over the last two days, the markets have ramped up expectations for more easing at the scheduled March 18 meeting.

EUR/USD initially saw an increase in upward momentum in the last few days of February as a shift to risk aversion led to a short-covering in the euro which is a currency often borrowed to fund riskier trades. Since then, the pair has maintained the upward momentum as the difference in interest rates between the euro and US dollar has narrowed, and is expected to continue narrowing.

With the markets focused on the potential impacts the Coronavirus will have on the global economy, and how central banks respond, today’s US jobs report is not likely to have much of an impact on the EUR/USD pair. The Fed’s decision this week shows its attempt to be forward-looking and the jobs report mostly reflects data before the Fed recognized the risks the virus presents.

Technical Analysis

EUR/USD has made several notable technical breaks this week, and the upward momentum continues to be strong. In early trading on Friday, the pair made a firm break above 1.1225 resistance which is a level that triggered a reversal in the recovery rally that took place in the fourth quarter.

As a result, the exchange rate is trading at levels not seen since around the middle of July 2019. If the pair can sustain the technical break, EUR/USD seems poised to make a move to a major technical level at 1.1370. This horizontal level is taken from a weekly chart and served to keep the pair higher in the summer of 2018 and lower in the summer of 2019.

Further, the 200-week moving average resides near the level to create a confluence.

Bottom Line

• A rapid rise in further easing expectations from the Fed has caused a sharp fall in the greenback. The trade-weighted dollar index (DXY) is down 2% in the week thus far.
• With the ECB in a difficult position to ease policy, EUR/USD stands to gain further as the interest rate differential for the currency pair is expected to narrow further.