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EURUSD forecast for 01.05.2020

May 1, 2020

May 1, 2020

Euro has started the game badlyDmitri Demidenko

The ECB easier lending conditions are not enough to set the EUR/USD

bulls back

Wisdom comes with experience. The former ECB president, Mario Draghi, was good at communicating with markets. Christine Lagarde is learning to do it. Yes, she didn’t repeat the mistake made in Mar, saying that the central bank wouldn’t put up with high risks of the euro-area financial fragmentation. However, she doesn’t yet understand how the markets will react if they don’t get what they expected. Even if not all investors counted on an increase in the QE pace in April, but they expected the announcement that the ECB would buy “fallen angels”, the bonds, whose rating could be downgraded to a “junk” level amid the pandemic. The ECB disappointed the markets. Furthermore, Lagarde said that the OMT, program developed during the 2012 debt crisis, is not relevant under the current conditions.

After it became known that the euro-area GDP drop in the second quarter had been the worst ever, the Governing Council should have eased its monetary policy. Earlier, the euro-area economy, having been hit by the pandemic, down by 3.8% Q-o-Q, and 14.4% Y-o-Y, while the US economy dropped by 1.2% Q-o-Q, and 4.8% Y-o-Y. However, the ECB balance sheet expanded by €645 billion, while the Fed’s balance sheet increased by $2.3 trillion. The ECB should take active measures. The regulator cut the interest rate on the LTROs from – 0.5% to -1%, it also launched series of additional longer-term refinancing operations, called pandemic emergency longer-term refinancing operations (PELTROs) at the interest rate of -0.25%, whose resources can be effectively used when the old loan tranche expires.

Dynamics of European GDP

![LiteForex: EURUSD forecast for 01.05.2020][1]

Source: Bloomberg

It hasn’t been enough to satisfy the market. Investors expected some clues on the situation of Italy, Spain, and other euro-area countries that suffered the most from the pandemic. It is not yet clear whether the ECB will buy fallen angels. Besides, Christine Lagarde has said the OMT program, suggesting direct funding for stressed countries, which have the ESM credit line, is not appropriate in the current situation. Although it was announced that the regulator wouldn’t allow the euro- area fragmentation, the GDP data for the first quarter increased the risks of the Eurozone break-up. Italy’s economy was down by 17.6%, Spain – 19.2%, but Austria’s growth contracted by just 9.6%, besides, the EU leaders can’t reach an agreement on the from of the financial aid, whether there should be grants or credits. This makes the ECB gloomy forecast, suggesting the euro-area economy should drop by 12% in 2020, likely to come true.

In addition to the disappointment in the ECB, which failed to meet the market’s expectations, the [EUR/USD][2] surge to its two-week high also resulted from the rebalancing of the euro positions with the option strike at $1.08. That is a technical factor, which has a short-term effect. The euro has many flaws, so it can’t be rising steadily. Therefore, it makes sense to enter EUR/USD sell trades on the pair’s rise that should be followed by a rebound from resistances at 1.0965, 1.107, and 1.117.

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Price chart of EURUSD in real time mode

![Euro has started the game badly][5]

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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  1. cdn.liteforex.com/cache/uploads/blog_post/eurusd/euro-area-gdp-01-05-20.jpg?w=30&s=ba896e03011a7f489d226684f24e741a
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  5. cdn.liteforex.com/cache/uploads/blog_post/eurusd/liteforex-blog-eurusd-01-05-20.jpg?q=75&w=1000&s=05d306a3f4b20f2b0955859ef52d5943