- EUR/USD has been rallying in response to a new EU fund and hopes for a vaccine.
- Premature hopes and Sino-American tensions may trigger a correction.
- Tuesday’s four-hour chart is showing overbought conditions.
Modern times – no, not the Charlie Chaplin classic, but the change in Germany’s stance and toward supporting the EU economies, and also Moderna’s vaccine hopes. These two factors have boosted EUR/USD to the highest in two weeks. Can the currency pair extend its gains?
EU Fund: German Chancellor Angela Merkel and French President Emmanuel Macron held a joint video press conference and announced a plan to boost the European budget by €500 billion to support the economies. The European Commission will finance the new fond via new one issuance. The leaders refrained from calling it coronabonds, in order to receive the approval of northern hawkish countries.
Nevertheless, using the more acceptable EU budget and having Merkel’s approval raises the chances that this much-needed relief package will make it through and revive the hard-hit southern economies. The spread between Italian and German bonds squeezed – a sign of investor confidence – and the euro rallied.
The German ZEW Economic Sentiment beat expectations by leaping to 51 points, showing that investors in the largest economy are looking beyond the depressing present. The Current Conditions component disappointed with a drop to -93.5 points.
Another reason for the rally stems from hopes for a vaccine for COVID-19 from Moderna. Also here, the caveat is that the Massachusets-based company’s initial test included only eight subjects. The third phase is due in July. The news sent stocks rallying the safe-haven dollar down.
Jerome Powell, Chairman of the Federal Reserve, seemed to focus on optimism rather than pessimism. In prepared remarks for testimony, later on, Powell reiterated his commitment to do whatever is needed and hold interest rates low until America returns to full employment. He will speak alongside Treasury Secretary Steven Mnuchin, who stated that he expects strong growth in the second half of the year.
See Powell and Mnuchin in Congress: Praising programs and promising more
Will all this optimism continue?
Apart from caution regarding the reasons to be optimistically mentioned above, investors are currently ignoring Sino-American tensions. Washington and Beijing have squabbled over funding to the World Health Organization, Huawei, and coronavirus.
Hu Xijin, the outspoken editor of Global Times – an English-language Chinese outlet considered a mouthpiece of the regime – harshly criticized the US handling of the crisis, gloating over America’s 90,000 deaths. He also called President Donald Trump’s use of hydroxychloroquine “witchcraft”.
For now, Phase One of the trade deal is holding up, at least according to White House advisor Kevin Hassett.
Coronavirus cases and deaths have continued dropping in the old continent, which is gradually opening up. However, the most recent figures probably too low, the result of the weekend effect. Any setback may weigh on the euro.
EUR/USD Technical Analysis
The Relative Strength Index on the four-hour chart is flirting with the 70 level – entering overbought conditions. That implies a downward correction. Other indicators are positive, including upside momentum and trading above the 50, 100, and 200 Simple Moving Averages.
All in all, a small correction may happen before the upside resumes.
Resistance awaits at 1.0955, the daily peak, and the highest in two weeks. The swing high of 1.0970 the mid-April top of 1.0995, and the early May peak of 1.1020 are next.
Some support awaits at the early May swing high of 1.0925, followed by 1.0895, a high point last week. The next levels are 1.0870 and 1.0820.
More: Political economy in the age of Trump – A conversation between Barbara Rockefeller and Joseph Trevisani
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