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The euro is once again on a decline due to a number of factors. First, is the increasing fears of a second outbreak of the coronavirus pandemic, which appeared after new infections jumped when the borders in the EU opened. Second, is the intensifying problem between the US and China, as the US stepped up its trade conditions with China. And third, is the pessimistic forecast of the International Monetary Fund which says that the prospects for global economic recovery is weak.
The prospects of the euro became blurred due to the high possibility of a second outbreak of the pandemic in the EU, as well as the fading hope of an EU recovery plan. The bullish trend in risky assets may stop soon and growth can only resume if EU countries resort to decisive and aggressive actions such as a joint fiscal response to the coronavirus.
With regards to relations between the US and China, the situation deteriorates more and more, as the US continues to accuse China on a number of issues. According to National Security Advisor Robert O'Brien, the accusations against China are connected with an attempt to undermine the sovereignty and economy of the United States, as well as its partners. He said that all attempts to manipulate the people and US authorities will be met with active resistance, after which retaliatory measures will follow. The accusations include theft of intellectual property, attempt on human rights and aggressive expansionism. O'Brien also mentioned the issue of Chinese authorities hiding the coronavirus pandemic in Wuhan.
As for China, authorities are not sitting still. Yesterday, it was revealed that active preparations are underway for the replacement of the US dollar, provided that the international SWIFT system is disconnected. Implementing such a decision is very likely to occur, as SWIFT is one of the tools that the US plans to use to influence China.
US President Donald Trump also signed a memorandum yesterday on the introduction of regular duties to protect the trade in seafood. According to Trump, if a sales representative indicates that China is not fulfilling its procurement obligations under the agreement on the first phase in relation to seafood, repressive duties will be implemented.
News are also circulating that the US is planning to add duties on imports of goods from France, Germany, Spain and the UK. It will amount to $ 3.1 billion, in which duty will include categories of goods such as trucks, gin and olives. Existing import duties on aircraft may also be raised, which will only exacerbate the dispute between Airbus and Boeing.
As for the forecasts of the International Monetary Fund which also put pressure on risky assets, the significant risks for the global economy has escalated due to the widespread escalation of the pandemic. A 4.9% decrease in world GDP is expected this year, while as early as April of this year, the global economy could shrink by more than 3%.
Statements of Fed representative Charles Evans were also anticipated by traders yesterday. According to Evans, economic recovery would take longer due to problems associated with coronavirus. The faster-than-expected business resumption could lead to new outbreaks of the virus, which "creates even more uncertainty for the economic outlook, which will require additional fiscal and monetary policies."
Nevertheless, the stance of the Fed, including chairman Jerome Powell remains the same. In the second half of the year, when the economy begins to feel more confident, the completely destructive consequences of COVID-19 will be understood. Most likely, the ultra-low interest rates will please the market for a rather long time, which will lead to a gradual weakening of the US dollar against risky assets.
As for the technical picture of the EUR/USD pair, its further direction will depend on how the bulls behave in the support level of 1.1230. If the decision of the ECB regarding monetary policy is accepted by traders positively, movement above the resistance level 1.1280 may occur, a breakout from which will quickly push the pair almost to the weekly high in the area of 1.1325. However, if the bulls fail to be active in the area of 1.1230, pressure on risky assets will increase, which will lead to an update of the lows of 1.1200 and 1.1170 by the end of the week.
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