EUR/USD Daily Forecast -Recovery Rally Fueled by Increasing US Rate Cut Expectations

The escalation in Coronavirus fears this week has prompted a rise in expectations for a rate cut from the Federal Reserve to provide support for negative impacts the virus will have on the economy.

Just last week, the CME FedWatch Tool indicated a 50-50 chance of a rate cut in June. This probability has been rising steadily and now points to a 90% probability. The CME data also suggests that a rate cut will come sooner than later as the money markets are pricing in an 80% chance of a cut at the April Fed meeting versus a mere 30% possibility a week ago.

Speeches from different Fed members in the early week suggested that the central bank is not seriously considering a rate cut as it was still too early to judge if a monetary policy adjustment was needed.

Investors certainly see a cause for concern and the S&P 500 has reacted accordingly. The US index is down just over 7% for the week thus far and has erased gains since early December.

Fed member Kashkari will speak later today and his view may offer a more recent take on the situation considering the out sized price swings in risk assets over the last couple of days. Kashkari has held a dovish view for quite some time and advocated for the Fed to remain on hold when it started its rate hike cycle a few years ago.

Spanish CPI was reported to rise 0.8% in the year to February which was in line with expectations. On a month over month basis, the index declined 0.1%. In the North American session, US durable goods and GDP figures will be released.

Technical Analysis

EUR/USD showed signs of exhaustion after printing a doji candle on Wednesday but displays renewed upward momentum in early trading today. The pair has crossed over its 20-day moving average, and if it holds by the end of the day, it will be the first daily close above the indicator since the middle of January.

Some bears may be trapped considering the 20-day moving average was not tested during the decline that dominated most of the month. Often, this indicator triggers at least a short-term reaction.

For this reason, major support for the session ahead is seen at the 20 DMA, currently at 1.0905.

Upside resistance is seen at 1.0956 followed by the psychological 1.1000 handle. The latter had held the exchange rate higher on several attempts since November ahead of the breakdown at the start of the month.

Bottom Line

• The momentum is shifting for the greenback as investors expect the Federal Reserve to respond to Coronavirus worries with further monetary policy easing.
• EUR/USD is on pace to close above its 20-day moving average for the first time this month and remains bullish over the near-term.