Bulls were less eager to buy the EUR/USD pair as the US Treasures had been sold off at the fastest rate over the past three years and the US stock indices increased by 5%. Risk appetite improved on hopes for coordinated monetary and fiscal stimuli by the world's central banks and national governments.
The White House is planning to introduce a bill on the temporary reduction of payroll tax until December 31. Italy intends to extend support for those affected by the coronavirus to more than 10 billion euros. EU finance ministers consider a possibility of creating a 25 billion euros investment fund. Japan said that it is ready to use extra budget. Australia is expected to cut taxes and increase government spending.
The EUR/USD pair has grown by 4% since February 20 and is likely to pull back. There are also fundamental reasons for that.
The EU was hit by the coronavirus more compared to the US. The number of cases as well as the impact of the quarantine on the economy demonstrates that. At the same time, the dollar weakened against the euro because the US central bank has more space for cutting interest rates compared to the European regulator. The Fed's unexpected lowered the borrowing costs by 0.5% last Tuesday which fueled expectations that the bank would continue easing monetary policy.
The ECB's policy meeting is going to take place this week. The regulator is expected to announce monetary easing to combat the negative impact of the coronavirus epidemic. Because of the negative interest rates in the eurozone, the bank is likely to extend its quantitative easing program. These measures are not as painful for the suffering banking industry in the region as negative rates.
According to technical analysis, the EUR/USD is likely to drop below 1.1300 in case of a corrective pullback. If the price breaks through the support levels of 1.1300 and 1.1280, bears can try to sell the pair.
In the long term, the dollar is expected to fall as a result of the Fed's monetary easing and a decrease in demand for the US government bonds as their yield has plummeted in recent weeks.
The markets expect the Fed to cut interest rates even further. According to the Bank of America, the regulator does not have any other choice under current circumstances.
The prospect of interest rate cuts in the United States by another 50 basis points can prove the carry trade strategy viable in the next 1-2 months.
The Bank of America says that the weaker dollar and the Fed's monetary stimuli can save the world economy and improve the situation in the developing markets.
RBC Capital Markets expects the dollar to drop as well. The company increased its forecast for the EUR/USD pair for the end of 2020 to 1.20 from 1.10.
According to experts at RBC Capital Markets, the value of the dollar is declining giving investors a reason to change their currency risk hedging strategies.
The foreign exchange market starts facing consequences of lower interest rates in the US and future cash flows are likely to be more apparent.
