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flag ★ EUR/USD: A soft policy will intensify the pressure on the European currency.

Forex Analysis:::2020-10-29T07:42:52

EUR/USD: A soft policy will intensify the pressure on the European currency.

The dollar climbed up in the market yesterday amid a high likelihood of lockdowns in many European states. This puts very serious pressure on investors, who until recently were betting on the strengthening of risky assets, inspired by the positive revision of many economic forecasts. Now, the outlook for German GDP for the 4th quarter is of increasing concern, not to mention other economically weaker countries in the eurozone.


Contrary to her previous statements, German Chancellor Angela Merkel announced that Germany is closing restaurants and bars to curb the spread of the coronavirus, but will leave shops, schools and kindergartens open. Theaters, fitness studios and cinemas will also be closed for one month, and foreign tourists will not be allowed to stay in hotels. According to Merkel, the current measures are necessary to prevent the further spread of the virus, especially against the background of increasing daily incidences.

Then, immediately after the announcement of new restrictive measures, the German government relayed its plans to take a new package of measures worth € 10 billion. This will be done to partially relieve the burden on businesses, but it is unclear yet how it will affect the German economy.

As for other European countries, many are also considering new lockdowns amid rising incidence and deaths from COVID-19. According to the latest data from the European Center for Disease Prevention and Control, the number of deaths from coronavirus in the European Union and the United Kingdom is close to 2.39 per million inhabitants. For example, in the US, this indicator is at the level of 2.43.

Thus, it is already expected that after Germany, French President Emmanuel Macron will announce new measures aimed at preventing the spread of COVID-19. This week, France recorded a 50% increase in the number of people infected with the coronavirus.

This also leads to the conclusion that the ECB will further soften its monetary policy. In this coming summit, many expect Christine Lagarde to shed light on the future of key interest rates, which are in danger of going negative next year. However, this may not be enough, especially in light of what is happening now. The EU could rely on its emergency fund, but it is unlikely to be enough to keep the economy from sinking if the EU undergoes another lockdown.


Therefore, any hints of a negative interest rate will induce large sell-offs in risky assets and lead to another reallocation of funds towards safe-haven assets, which means that it is unwise to open long positions before the ECB announces its decisions. However, it is also important to know that speculators could take advantage of this moment, since at the upcoming meeting, the ECB is unlikely to announce new stimulus measures, which could lead to a partial rebound of the euro upwards.

Nevertheless, at the moment, an upward correction could occur in the EUR/USD pair provided that the quote returns to the resistance level of 1.1761. Such will lead to the demolition of a number of sell stop orders, as well as on the growth of the euro towards the level of 1.1800. And if the ECB does not soften its monetary policy in today's meeting, the pair could reach the highs 1.1880 and 1.1960. But if the policy is softened, the euro will return to the level of 1.1720, and the bears will have an easier time to bring the quote to lows 1.1690 and 1.1640.

With regards to the current state of economies, a report published yesterday indicated that German companies are cautiously optimistic about hiring new workers, further confirming the more conservative approach of employers and their attitude towards the future. This data from the Ifo says Germany's employment indicator rose very slightly from 96.3 points to 96.5 points, however, the rising risks associated with the coronavirus will unfortunately put negative pressure on the figure in the future.

Analyst InstaForex
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