Germany is heading for a recession. The situation is fast moving. However yesterday Chancellor Angela Merkel announced a general lock down of Europe’s largest economy. All shops are to be closed, no touristic travel domestically or abroad, restaurants open until 6pm and no sports or cultural events allowed. So, consumption will drop dramatically. Large car manufacturers have also announced a temporary halt to production. The supply shock demand shock will be crippling and the economic impact will be staggering.
And the problem is not just Germany, Italy, Spain and France, the largest economies in the eurozone all face severe pressure from the coronavirus outbreak, as governments lock down countries with already very fragile economies.
Meanwhile US data is also disappointing. Retail sales declined a -0.5% in February, missing expectations of 0.2% increase. These figures show that consumption, the main driver of the US economy had started to slow even before coronavirus social distancing measures were enforced, raising fears that the data out of the coming months will be hideous.
Despite the Fed’s best efforts to ease pressures in the money markets recent signals suggest that the moves haven’t worked. This is most likely a result of lenders hoarding the dollar in expectation of increased liquidity needs from companies and growing concerns over bad loans. The pressure was most explicit in the euro/dollar 3-month FX spread which widened to 124 bps at one point, its widest level since the European debt crisis and up from just 20 bps earlier this month. This means that market player are willing to pay higher premiums for dollars, an amber warning signal flashing.
Levels to Watch
EUR/USD is down over 1.5% at $1.10, it has picked up off session lows of US$1.0974. It trades below its 50, 100 and 200 sma and comfortably below the descending trendline.
Immediate support can be seen at $1.0974 (today’s low) prior to $1.0953 (low 28th Feb) and $1.0880 (low 26th Feb).
Resistance can be seen at $1.1026 (200 sma), $1.1118 (today’s high) and $1.1130 (100 sma). We would be looking for a move above $1.1170 to negate on the current bearish trend on 4 hour chart.