EUR/USD: Targets $1.11 On Central Bank Policy Divergence

The euro is extending gains versus the US dollar in early trade on Monday, after surging against the greenback across the previous week as coronavirus fears sent the greenback tumbling. EUR/USD exchange rate rallied 1.67% across the previous week and is trading 0.6% higher at 08:50 UTC at US$1.1090.

ECB Limited In Ability To Act

Even as coronavirus spread around Europe the euro advanced. Last week, northern Italy became the centre of coronavirus news. The number of cases increased quickly in the eurozone’s third largest economy, as have the number of deaths. Italy’s industrial heartland is also on lock down.

The virus also spread rapidly beyond Italy’s borders with new cases across Europe including Switzerland, Austria and Spain. Apart from the obvious health headlines, financial growth forecasts are also being downgraded across the globe.

Over the weekend China’s Manufacturing PMI was the weakest on record with activity in the sector slower than in 2008 financial crisis. This is one of the first economic indicators to be published since the outbreak. The collapse in activity shows the severity of the problem. Manufacturing PMI figures will be closely monitored today, particularly the data from exporter nation Germany which is vulnerable to any slowdown in global trade.

Yet the reason the euro is still able to push higher is owing to the expected reaction from the European Central Bank compared to that of the US Federal Reserve. The ECB President Christine Lagarde is reluctant to act to ease policy. The ECB’s interest rate is already -0.5% and the central bank already buys €20 billion of bonds per month. The ECB’s ability to act is severely limited. The same cannot be said of the Fed.

Dollar Drops US Rate Cut Expectations Rise

According to the CME Fedwatch investors are assuming a 95% probability of the Fed cutting rates in March. This is up from 23% just a week ago. On Friday, Federal Reserve Chairman Jerome Powell hinted that the Federal Reserve could cut interest rates as soon as March to support the US economy in the face of risks posed by the coronavirus. Although he also commented that the US economy was in good shape currently. Today investors will look towards the release of US manufacturing PMI for further insight into the health of the US economy.

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