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The risk of a correction lower for EUR/USD is increasing after recent sharp gains. COVID trends in the Eurozone are moving in an unfavourable direction. If sustained it will more seriously challenge recent bullish EUR sentiment while the spread of COVID in the Us is now easing and there are signs US activity is regaining upward momentum, strategists at MUFG Bank apprise.

Key quotes

“After peaking on 22nd July, the growth rate of new US COVID cases has fallen back to 52,327 per day. An improving trend is evident in the number of people of hospitalized which has fallen back to 47,252. Tentative signs are now emerging that US economy is regaining upward momentum again although it is still early days. The improving trends could already be helping to lift US yields from lows at the start of this month, and ease bearish sentiment towards the USD. The main risk to the recent improvement in US cyclical momentum is the failure to agree on a more comprehensive fiscal stimulus package.” 

“COVID trends in Europe have clearly deteriorated over the past month as economies have re-opened. The growth rate of new COVID cases in major eurozone economies has increased sharply from a weekly average of 1,620 per day in the middle of July to 8,650 per day. It is still well below the peak from the start of April of just under 27k per day but the trend is clearly moving in the wrong direction which increases the risk of restrictions being re-imposed that would put a dampener on economic recovery momentum. It poses a threat to the sustainability of the EUR’s recent sharp strengthening against the USD. Admittedly, the scale of the COVID outbreak remains on a larger scale in the US even as relative tends are now improving in the USD’s favour.”

“The developments are increasing the risk of a correction lower for EUR/USD in the near-term and support our current tactical short trade idea. A break below support at 1.1700 will be required to trigger a deeper correction.”