March 7, 2020
First, a review of last week’s events:
- EUR/USD. It seems that now one can ignore the macroeconomic indicators, which previously not only had an impact on the quotes, but also could reverse trends by 180 degrees. The situation in the financial markets has been completely dominated by the coronavirus for many weeks on the run, which now affects not only the health of people, but also the actions of governments and Central banks.
Global regulators are massively lowering interest rates. The effect of a bombshell was produced by the decision of the US Federal reserve, taken at an emergency meeting convened for the first time since the 2008 crisis, to lower the key interest rate from 1.75% up to 1.25%. This decision was the outcome of a teleconference with the participation of Finance Ministers and Central bankers of the G7 States on monetary policy in the face of the coronavirus Covid-19.
Come from war, you belong to war, and a lull on the fronts of the fight against this infection is not yet expected. The amplitude of fluctuations of the basic currency pairs breaks all the trading strategies created in a quiet and calm 2019. The DXY dollar index lost 1.7% over the past week, while it had been not far from 3-year highs just two weeks before.
Starting from January 01 to February 20, 2020, the dollar rose against the euro by 460 points, which is an impressive figure in itself. But onwards and upwards: having made a U-turn, the EUR/USD pair has soared by more than 640 points in just the last two weeks! And all these jumps, both up and down, took place without any serious corrections, knocking out first the bulls, and now the bears. The height of only one daily "candle" on Friday, March 06, was more than 140 points.
It should be noted that in general, the forecast given last week by the majority of our experts (60%) and supported by 70% of the indicators was correct. The new year's high at 1.1240 was named as the goal the pair was supposed to reach. However, on the last day of the trading session, against the background of an 18% collapse in the yield of 10-year us bonds, the pair did overcome this resistance, reaching a peak of 1.1355, and it ended the five-day period at 1.1300;
- GBP/USD. Surprisingly, the fact is: no matter what happens in the world in general, and in the UK in particular, the GBP/USD pair repeatedly returns to the iconic support/resistance zone of 1.3000 for the fifth month in a row. This was also the case last week: after finding the local bottom at 1.2735, the pair flew up almost 300 points and finished at 1.3030. This fully confirmed the forecast given by the majority (65%) of experts who predicted the pair's return to the 1.3000-1.3070 zone;
- USD/JPY. The flight from the dollar and the growing demand for hedging currencies allowed the yen to demonstrate a phenomenal two-week growth of 720 points, i.e. by 6.4%. However, analysts' forecasts were even bolder. They expected that, supported by the coronavirus, the pair will break through the support of 107.50, 106.65, 105.65 one after another and approach the August 2019 low in the area of 104.45. The supports were broken indeed, however, the pair failed to achieve its goal: the local low was recorded on Friday, March 06 at 104.98, and the final chord sounded at 105.35;
- cryptocurrencies. We doubted in the last review that Bitcoin has actually become the same hedge asset as the euro or, even more so, the yen, as many crypto gurus have tried to prove to everyone. As it turns out, we are not alone in our doubts. Billionaire, former Wall Street banker and Bitcoin enthusiast Michael Novogratz was surprised to find that Bitcoin quotes were rolling down at the same time as the dollar and stock indices in the last decade of February. "How did BTC stop being an asset for hedging risks and start trading as high-risk securities? Novogratz exclaimed on Twitter. "It hurts!"". In his opinion, those traders who lost on the stock market started shorting Bitcoin in an attempt to catch up, and eventually drove the quotes down.
In fairness, it should be noted that the reference cryptocurrency has tried to restore its reputation last week. However, it failed: having lost more than $2,000 in price over the previous two weeks, it only won $730 back. This success against the background of the explosive growth of the euro and the yen looks quite modest. So it's probably too early to talk about Bitcoin as a truly protective asset.
As for such top altcoins as Ethereum (ETH/USD), Litecoin (LTC/USD) and Ripple (XRP/USD), they have traditionally followed in the wake of the BTC/USD pair. The capitalization of the crypto market in the past week has remained almost unchanged: at the level of $256 billion, the Bitcoin Crypto Fear & Greed Index has also almost frozen in place: the drop from 40 to 39 points is simply not worth taking into account.
As for the forecast for the coming week, summarizing the opinions of a number of experts, as well as forecasts made on the basis of various methods of technical and graphical analysis, we can say the following:
- EUR/USD. 100% of the trend indicators on H4 and D1 are colored green. But 25% of the oscillators on D1 indicate that the pair is overbought, which can be a strong signal for a downtrend reversal or a serious correction. Graphical analysis on H4 looks down as well. (Although, one must say, coronavirus hardly pays attention to divergence and RSI, Stochastic or MACD readings).
As for fundamental analysis, at the moment the situation looks ambiguous. On the one hand, the probability of another rate cut at the next meeting of the US Federal Reserve on March 18 is close to 100%. Moreover, this reduction may become the next stage of the cycle, as a result of which the rate will be at the level of 0.5% or even lower at the end of the second quarter – President Donald Trump calls for lowering the rate to 0%, providing additional liquidity to private banks and easing monetary policy as much as possible.
Falling interest rates play against the dollar. And then, once again, the yield on 10-year US bonds may fall. But, on the other hand, the situation in Europe is even worse. First, the Eurozone economy is much more strongly correlated with the Chinese economy. And secondly, if the Fed still has room for maneuver and further rate cuts, the ECB has almost no such space. The deposit rate for commercial banks in euros is already in the red and is -0.5%.
A representative of the ECB admitted the possibility of further reduction of already negative interest rates last week. However, whether the European mega-regulator will decide to take such a step may become clear after its meeting on Thursday, March 12.
As for analysts' forecasts, according to most of them, as the situation with the coronavirus resolves, the situation on the financial markets will stabilize, and the EUR/USD pair will return to the range of 1.1000-1.1100. 60% of experts voted for this result in the weekly perspective, 70% in the monthly perspective, and 80% in the medium – term perspective. The nearest strong supports are 1.1240 and 1.1175.
40% of analysts have voted that the dollar will continue to fall in the coming week and the pair will reach the 1.1450-1.1500 zone;
- GBP/USD. The pair has once again returned to the medium-term Pivot Point 1.3000 zone. Graphical analysis on H4 predicts the pair's movement in the side channel 1.2860-1.3070 for the next few days, while on D1 the range of weekly fluctuations is naturally wider:1.2760-1.3170. But in both cases, the pair eventually returns to the 1.3000 horizon.
95% of the trend indicators and 75% of the oscillators on both timeframes look north, but 25% of the oscillators are already in the overbought zone.
As for the experts' forecast for the next week, it is impossible to give someone an advantage – a third of them have voted for the pair's growth, a third for its fall, and a third for a sideways movement. However, when moving to the forecast for the month, the scales are tilted towards the British currency – 60% of analysts believe that the pair will be able to reach the 1.1400-1.1500 zone by the end of March;
- USD/JPY. It has been repeatedly stated that market fears of the Covid-19 epidemic force investors to redirect cash flows towards protective assets. And here one should pay attention to the dynamics of the Fear Index VIX, which is one of the measures of expectation of stock market volatility. It is generally accepted that if the VIX has reached the 40% mark and continues to grow, the stock exchange has started to panic. So, over the past half-month, this index has grown from 15% to almost 47%. If you add a drop in the dollar to the collapse of US government bonds, it becomes clear that in such a situation, the yen is a big winner. "Country of the rising yen" – that is how many investors now call Japan.
Market fears are also reflected in the readings of technical analysis tools. 100% of trend indicators and 85% of oscillators are now colored red.
The remaining 15% of the oscillators give signals that the pair is oversold. Following them, the majority of experts, supported by graphical analysis, expects the turn of the pair up. It is clear that the trend change to an uptrend is directly related to the success of the fight against Covid-19. Therefore, the forecasts for the coming week are very cautious: only 55% of analysts have voted for the pair's growth here. But the medium-term forecast looks much more optimistic for the dollar: its growth relative to the yen is expected by 80% of experts. The nearest resistance is 107.70, the goal is to return to the 108.25-109.65 echelon.
The support zone is 104.45-105.00. It was at the peak of the aggravation of trade risks that the price rested not only in 2019, but also in 2018. And if the pair manages to break through this support, the path for it will be open to the lows of 2016 in the area of 99.00-101.00;
- cryptocurrencies. It should be noted that in general, the news background is favorable for Bitcoin. For example, the German Federal Office for Financial Supervision (BaFin) has for the first time recognized the main cryptocurrency as a financial instrument. And the largest insurance operator Lloyd's of London, together with the start-up Coincover, presented a new solution for insuring cryptocurrencies in hot wallets. According to them, since the beginning of the year, the digital market has started to "warm up", so we should expect a "new wave" of traders and investors. Miners are also not backing down: the hashrate of the Bitcoin network set a new historical record last week, rising to 136 exahashes per second.
All this affects the forecasts of analysts, among whom optimism reigns as well. 65% of them expect the BTC/USD pair to grow to the $9,500-10,000 zone in the near future, 10% have taken a neutral position, and only 25% expect the pair to fall to the $8,250 horizon.
NordFX Analytical Group
Notice: These materials should not be deemed a recommendation for investment or guidance for working on financial markets: they are for informative purposes only. Trading in financial markets is risky and can result in a complete loss of deposited funds.