The tentative improvement in risk appetite this morning has seen the EUR give back some of its recent gains vs. the USD. Although EUR/USD was oversold in the 1.08 region, the EUR’s fundamentals are still looking strained with Italy once again threatening to be the fault line in the Eurozone, economists at Rabobank apprise.
“This morning’s news that the Eurozone grew a better than expected 1.0% y/y in Q4 suggest that the economy may have been on a slightly firmer position going into the coronavirus than initially thought. That said, it is still our central view that the Eurozone will fall into recession this year, with Italy set to lead the pack lower.”
“We do expect the ECB to cut its discount rate by another 10 bps at this week’s policy meeting and also to announce targeted liquidity measures.”
“We see scope for a near-term retracement back towards the EUR/USD1.1220/30 area which represents the late December high.”
“While spreads have narrowed moderately today, any indication that this situation is worsening could lead to a surge in demand for USDs and another drop in the value of EUR/USD.”