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  • EUR/USD is better bid above 1.12 amid fears of a global recession. 
  • JP Morgan expects the US economy to enter a recession this year. 
  • The single currency could continue to draw haven bids. 
  • Fed’s liquidity injection could relieve the stress seen in the credit markets on Thursday.

EUR/USD has moved back above 1.12 ahead of the London open and could continue to draw haven bids amid heightened fears of a global recession.

“Given the drastic measures taken by governments across Asia and Europe to lock down their cities at the expense of their economies, Q1 will be a dark one for most countries. A global recession is all but certain,” noted BK Asset Management’s Kathy Lien. 

Economists at JP Morgan have revised lower US gross domestic product (GDP) forecast to -2 percent annualized growth in the first quarter of 2020, and -3 percent in the second quarter. Essentially, the world’s second-largest economy is likely to enter a recession in 2020. 

As a result, investors are likely to continue rotating money out of risk currencies and into the haven currencies like the EUR. The single currency has become a new safe haven, which is not surprising, as it is backed by a huge Eurozone current account surplus and the European Central Bank is running a negative interest rate policy. 

The central bank held rates unchanged on Thursday and boosted its asset purchase program by EUR120B. Further, it introduced a new program of cheap loans that would basically pay banks up to 0.75% to lend to small businesses. The EUR bears, however, were not impressed, as indicated by the long-tail (seller exhaustion) attached to Thursday’s candle. 

Focus on dollar funding markets

The three-month euro-dollar and dollar-yen swap spreads had widened to levels last seen in 2017 on Thursday. Notably, spreads widened by nearly 40 bps, the biggest single-day rise since December 2008, highlighting stress in the dollar funding markets. 

The Federal Reserve responded by announcing a $1.5 billion liquidity injection. As a result, the credit markets may normalize ahead of the weekend, paving the way for gains in EUR/USD. 

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