March 28, 2020
First, a review of last week’s events:
- EUR/USD. The pair's flights in recent weeks can be compared to aerobatics: first, an almost vertical takeoff up by 630 points, then a vertical peak by 860, and now a new leap up by 445 points.
Several factors caused the sharp drop in the dollar. The main one is the actions of the US Federal Reserve, which lowered the interest rate to 0.25% and launched a number of programs to support the US economy, injecting billions of dollars and distributing money to its citizens. As a result, the Fed's balance sheet exceeded a record 4.5 trillion dollars, and according to economists' calculations, it may even reach 6 trillion dollars. As a result, US stock indexes flew up, the S&P500 jumped by as much as 20%, pulling the EUR/USD pair with it: investors reacted positively to the steps taken by the US leadership and began to turn away from the dollar as a safe haven asset, preferring more attractive assets at the moment.
The ECB's coronavirus-related decision helped the European currency as well. Previously, the ECB could buy no more than a third of a country's public debt under the quantitative easing (QE) program, but now the Bank has removed this restriction, which has had a positive impact on the yield of Eurobonds and contributed to the growth of the euro.
It should be noted that 60% of experts expected the pair to return to the 1.1000-1.1240 zone within a month, and 75% during the quarter. But, as practice shows, the COVID-19 pandemic serves as a powerful catalyst or driver, repeatedly speeding up market processes. So, it happened this time: the pair reached the set goal not in a quarter, nor even in a month, but in just five days, putting the final point on Friday, March 27 at 1.1140;
- GBP/USD. Macroeconomic indicators such as the business activity index (PMI) indicate a contraction of the UK economy, to protect which the Bank of England has twice lowered the interest rate and increased the volume of bond purchases by £200 billion over the past two months. However, at the last meeting, the leaders of this regulator unanimously voted against further reducing the rate and keeping it at 0.1%. It was also decided to leave the volume of bond purchases unchanged, at the level of £645 billion. This indicates that the Bank of England considers the measures taken at this stage sufficient.
The impact of the coronavirus on the UK economy will become more apparent after we learn the results of the first quarter of 2020. So far, the situation here looks little better than in the EU and the US. Support for the pound is now also provided by the ability of the Government of this country to print its own money, without any agreements with the EU.
The bounce of the GBP/USD pair up last week looks even more impressive than the growth of EUR/USD: the British pound took away more than 830 points from the dollar. Recall that on March 20, it fell to the lowest values for the last 230 (!) years, and from 70% to 80% of analysts expected that, having fought off this bottom, the pound will be able to return to the zone of 1.2725-1.3025 during April-May. So far, this forecast is justified: the pair completed the five-day period on the way to the set goal, at the level of 1.2470;
- USD/JPY. The end of March turned out to be favorable for the Japanese currency, whose quotes, as usual, depend on the risk appetite of investors, oil prices and the yield of US government bonds.
The forecast, which was supported by the majority of experts, turned out to be correct by 99.9% if not by 100%. According to it, the pair should have turned south and headed to the 107.00-107.70 zone. This happened in fact: after making several attempts to break through the resistance of 111.60, the bulls gave up, and the bears very quickly lowered the pair by 385 points – to the level of 107.75, near which – at the level of 107.95 – it ended the trading session;
- cryptocurrencies. We suggested in the previous forecast that Bitcoin quotes can be used as a leading indicator for forecasts for major dollar pairs. The main idea was that a lull in the crypto market during financial storms can be a harbinger of a trend change or a strong correction for EUR/USD. According to the voiced theory, the transition of the BTC/USD pair to a flat state in the conditions of continued over-volatility in other markets may indicate that the dollar has reached critical values, and large speculators do not know what to do, whether to increase dollar assets by selling BTC, or, on the contrary, to convert fiat into cryptocurrency.
Of course, this is only a theory, with many reservations, but last week it was confirmed: the charts show a flat in the crypto market and a predicted sharp reversal of the trend for EUR/USD.
Bitcoin has risen in price by less than 9% over the past seven days, Ripple (XRP/USD) – by 10%, Litecoin (LTC/USD) – by 3%, and the growth of Ethereum (ETH/USD) was less than 1%.
By the way, Ethereum co-founder Vitalik Buterin recently presented a roadmap for the development of ETH for the next 5-10 years. In addition, he called for the development of decentralized bridges between Ethereum and other cryptocurrencies and for the creation of a "real" decentralized exchange (DEX) for the exchange of BTC and ETH. However, judging by the Ethereum quotes, his ideas have not yet found a response in the hearts and wallets of investors.
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. After winning back 50% of the losses of the previous two weeks, the pair eventually returned to the Pivot Point 1.1100 zone, around which it has been rotating for many months, starting from the end of July 2019. This suggests that the market does not know what else to expect from the coronavirus and from the governments that have entered the fight against it.
On the one hand, we can observe an avalanche-like increase in the number of diseases in the United States, and it is unknown whether President Trump and his administration will have the strength and ability not just to take control, but to seriously improve the situation. A significant part of the money that the Fed is pouring into the country's economy goes to pay unemployment benefits and one-time payments to individuals who... are quarantined and can't spend it. As a result, these funds will not reach the real sector of the economy in the near future. US Treasury Secretary Steven Mnuchin exudes optimism, saying that the current situation is not yet a financial crisis. However, the head of the Federal Reserve, Jerome Powell, already agrees that the US economy "may well be in recession", and the agenda is now dictated by the virus. And it is possible that a severe recession may turn into a depression at some point.
On the other hand, the situation in Europe is no better. The results of the EU summit held on Thursday, March 26, were described by some analysts as "simply terrible". The representatives of the countries did not manage to reach a common opinion, the idea of European "corona bonds" is buried (at least for a while), and the ECB is having a hard time maintaining stability in the euro area. According to a number of experts, such disunity of the EU member states severely limits the opportunities for strengthening the European currency.
At the moment, the graphical analysis points to the north, the vast majority of indicators look in the same direction, and only 15% of the oscillators on H4 and D1 give signals about the EUR/USD pair being overbought.
Among experts, the majority (60%) is also set to continue the growth of the pair, while the remaining 40% voted for the fall. Resistance levels (taking into account current volatility) are 1.1240, 1.1365 and 1.1500, support levels are 1.1000, 1.0850, 1.0775 and 1.0635. Well, two seemingly unattainable goals (although, at present, everything is possible): bullish – 1.1800, bearish – 1.0550.
As for the release of macroeconomic indicators, data on unemployment and the consumer market in Germany and the Eurozone as a whole will be available on Monday, March 30 and Tuesday, March 31. And the second half of the week will bring us a whole avalanche of data on the US labor market. Let's just say that in all cases, the forecasts are disappointing. For example, the number of jobs created outside the us agricultural sector (NFP) is expected to fall from plus 273K to minus 123K;
- GBP/USD. Assessing the prospects for the British economy, chief economist at IHS Markit, Chris Williamson, almost repeated what Jerome Powell said about the American. "The onset of a recession of unprecedented scale in modern history is becoming more likely," – this is the prophecy of Williamson. And even the UK's exit from the EU does not have such a negative impact on the economy as COVID-19.
In this context, despite the medium-term forecast, 60% of analysts expect a downward trend reversal and the beginning of a new phase of the pound's fall in the next week. If we talk about technical analysis, the H4 timeframe is dominated by green, but 20% of the oscillators are already in the overbought zone. The signals of oscillators and trend indicators on D1 can be described as multidirectional.
Graphical analysis on both timeframes supports the bearish forecast but assumes that the pair will stay in the range of 1.2250-1.2600 for some time before going down sharply.
The resistance levels are 1.2600, 1.2750, 1.3025, 1.3200 and 1.3515. Support levels are 1.2250, 1.2200, 1.1800 and 1.1450;
- USD/JPY. The pair ended the last week near the strong support/resistance level of 108.00, and most analysts (60%), as in the case of EUR/USD and GBP/USD, expect a trend reversal and subsequent strengthening of the dollar. If this happens, the pair has quite a lot of chances to still overcome the 111.60-112.00 mark and rise another 100 points higher. The nearest strong resistance is in the area of 109.70-110.00.
The remaining 40% of experts, supported by graphical analysis on H4, side with the bears. Support is in the zones 106.70-107.25 and 104.70-105.00, further targets are 103.00 and the March 09 low in the area of 101.00;
- cryptocurrencies. The Crypto Fear & Greed Index moved just 3 points over the week, from 9 to 12, and still indicates the presence of a strong fear in the market. At the same time, the number of requests for the word "Bitcoin" in the search engines Baidu and Google has grown significantly over the past month, and most users are interested in buying cryptocurrency. So, the number of requests increased by 138% over the past month in the Baidu search engine, and according to Google Trends, the growth was 57%.
As usual, the growth of the reference cryptocurrency is predicted by all sorts of crypto gurus, especially since now they have a powerful ally in the person of the COVID-19 coronavirus. So, the well-known analyst Joseph Young expressed confidence in the positive impact on Bitcoin of the measures taken by the US Federal Reserve to stimulate the American economy. "The Fed endlessly prints money to pump the markets — this is good for Bitcoin. The devaluation of the dollar in the long run is good for Bitcoin. The short-term prospects may be bleak for this cryptocurrency, but the long-term outlook remains very bright, " he said.
Mike Novogratz, the founder of Galaxy Digital, also agrees with Young. He is confident that the global economic crisis triggered by the coronavirus pandemic will be the time of Bitcoin's breakthrough. "Bitcoin will remain volatile for the next few months, but the macroeconomic backdrop is what it was created for. This year should be and will be the year of BTC," the billionaire said.
Philip Salter, Operating Director of Genesis Mining, joins this chorus of voices. He is convinced that the deepening economic crisis will lead to an increase in the popularity of Bitcoin as a tool for hedging the risks of the banking system. "If the development of the economic crisis can be prevented, there will be no major changes to Bitcoin. However, if there is a real collapse, the interest in the first cryptocurrency will take off. The more skepticism about the old economy, the more interest in bitcoin, " the top manager of this popular cloud mining service shared his thoughts.
As for the nearest forecasts, the well-known trader Ton Weiss is sure that with the current Bitcoin quotes, the probability of falling below the recent low of $3800 is 20-25%. The first cryptocurrency will have even less chance of collapsing to such levels if it overcomes the $6800 level - just 15%. "Going above the $6800 level will give me 85% confidence that we will not go below this level," Weiss States. In general, 55% of experts expect that the BTC/USD pair will reach the $7,500-8,000 zone within the next few weeks. The remaining 45% of analysts, on the contrary, predict a fall in the pair. In their opinion, BTC/USD will once again try to test the support of $5,700 and, if successful, will again be at the level of $5,000.
NordFX Analytical Group
Notice: These materials are not investment recommendations or guidelines for working in financial markets and are intended for informational purposes only. Trading in financial markets is risky and can result in a complete loss of deposited funds.