Chart of the Day EURUSD
EURUSD another leg lower before correction
SP500 futures gapped lower and locked limit down on last night’s open – recovering slightly through the night – with Asian markets following, due to a further increase in the reported death toll over the weekend from covid-19 and has led to a number of governments imposing stricter controls on movement. The Fed’s Bullard suggesting the US unemployment rate may hit 30% and GDP could drop 50%, not helping sentiment. Neither was the news that Congress failed to agree on a bipartisan Virus Rescue Bill worth around $2tln – the Democrats saying too much is allocated to large business and not enough to support hospitals. A procedural vote seeking to advance the bill is expected in the Senate around lunchtime (US time). Meanwhile, the RBNZ is the latest central bank to instigate a QE programme to the tune of NZ$30bn. With a light calendar today, the focus is going to remain on what support measures are being implemented to contain the pandemic and deal with the economic fallout.
Press reports suggest the German government is preparing to set up a €600bn stabilisation fund, aimed at helping companies with liquidity problems. €100bn of which will be used specifically to allow the German government to buy stakes in struggling strategic businesses to stop them from failing. Domestically, following Chancellor Sunak’s announcement of a significant package late on Friday, the HoC is set to rush through emergency legislation today giving ministers greater powers to deal with the covid-19 virus. The measures include giving authorities the powers to shut down ports and detain people suspected of having the virus. Overnight, markets will be watching the Japanese flash PMI readings for March. Both were sub 50 in February and are expected to fall further as the country went into lockdown.
EURUSD implied volatility which gauges future volatility and option premiums the one week implied volatility is now trading at 20.0 which is a ten year high compared to the record 3.0 low printed in February. The premium/break-even for a simple vanilla straddle is 237 pips. That’s the spot pips owners must capture, in either direction, before profit is made. Risk reversals show additional volatility premium, for EUR puts over calls That’s the right to sell, versus buy EURUSD at a predefined future date
From a technical & trading perspective EURUSD is consolidating near last weeks low, as 1.0750 caps corrective attempts, then we should see bids at last weeks lows eroded and the decline should accelerate to test bids towards the pivot point cluster at 1.0500/50 this is the first level of interest for a more sustained recovery which could see prices correct the decline from the early March decline to test offers and stops towards 1.10. If buyers fail to defend the 1.05 area then we could see the decline extend to test down towards the previous 1.0300/40 lows from 2017, here we could also see a basing attempt to correct higher with a retest 1.0750 as resistance as the first port of call. Note from a seasonality perspective the USD has a seasonal tendency to witness weakness from the end of March through April.
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