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  • EUR/USD consolidates below rally highs, Fib correction in play. 
  • Risk to both the upside and downside leaves the market in wait and see mode.

EUR/USD has been capped on the upside and is consolidating around the 1.13 figure after a strong technical rally following a completed cup and saucer pattern which raises prospects now of a Fibonacci retracement with a confluence of market structure. 

The fundamentals at play have predominately been with regards to the market’s risk-on profile stemming from the race by nations to slow ease lockdown restrictions and open their economies before they are in a state beyond prepare. 

The market sentiment in recent weeks has beaten back USD strength across the board, however, the recovery in EUR/USD has been fed by a couple of significant EUR centric events as well for which analysts at Rabobank have argued that they could be game-changers for the EUR. 

“At the very least they contribute towards a levelling up in the ground between the EUR and the USD”, the analysts said.

Last week’s announcement by the ECB to scale up the size of its PEPP by EUR600 bln was above the median consensus and certainly more than we have anticipated.

It could be taken as a signal that the ECB is not interested in pushing the discount rate any further into negative territory, which on the margin may been see as EUR/USD positive particularly given lingering concerns that the Fed may eventually give into the draw of negative rates.

The other event stays with the fact that the European Commission’s proposed Recovery Fund would allow for sizeable grants to countries most impacted by the crisis. This boosted peripheral bonds and gave a sizeable lift to the EUR when it was announced last month, as noted by the analysts at Rabobank who argue that the Recovery Fund has the potential to be game-changer in terms of both political and fiscal cohesion in Europe:

Trade wars, COVID-19 and when the stimulus is dry, what then?

While there is certainly scope for higher euros, we are still a long way from being out of the woods yet. The world economy is in tatters and even improvements in jobs numbers still leave them in deep recessionary territory. The feel-good vibes from the Nonfarm payrolls number may not last. Half the word is still shut down. These charts may only be falsely soothing. 

While the stimulus will only stretch so far before it runs out, we are still a long way off from seeing the United States of Europe, so this is still very early days, as analysts at Rabobank allude to:

It still has to be ratified by all 27 EU counties, so it would appear reasonable to assume that there will be some watering down in its content before it becomes law. It has already been met with some resistance with the Finnish government proposing at the end of last week that the share of loans vs. grants in the fund be increased and that the size and duration of the package be reduced. European politics have tended to be characterised by horse-trading and muddling through, so there is good reason to be sceptical as to composition of the package that will eventually be passed. That said, several European politicians including EC President von der Leyen have recognised that the stakes are high.

Then, there are still rising tensions between China and the US which will likely come to the fore sooner than later and worsen ahead of the US elections. Not to mention, we could easily see second waves of the virus, and considering the world wide demonstrations, they are all of a sudden a lot more likely. 

There are enough downside risks for a bearish correction to really start to take shape as profit-taking ensues. 

EUR/USD levels

On the basis that there could be another rush into the safe haven USD if there is a second wave of Covid-19 and given scope that risk appetite could dwindle against the weight of poor economic news, we see scope for another dip lower in the 6 month horizon towards EUR/USD1.09,

analysts at Rabobank have explained. 

If the market stalls here, then are the prospects for a 38.2% Fibonacci retracement to the prior structure as being the daily 16th March bullish candlestick, the one and only daily positive interruption to the 9th March sell-off. This confluence falls in around 1.1187/1.1236.

 

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