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EURUSD: Can the Euro stage a recovery in Q1 2020?

EURUSD fell by 2.22% for the year, with most of the losses coming in the first three quarters. It bounced back in Q4 2019. What of Q1 2020?

The pains of the past year could give way to a steady Euro recovery, considering the expected softer Dollar environment The “phase one” US-China trade deal should bring some respite to the EU economy The EU is not yet out of the woods, as member countries could draw the ire of either the US or China in the coming months

Written by Han Tan, Market Analyst at FXTM

2019 was a dismal year for the Euro, as it posted an annual decline against most G10 and Asian currencies. EURUSD fell by 2.22% for the year, with most of the losses coming in the first three quarters before bouncing off the 1.09 support level in early October to end the year at 1.12.

Still, the pains of the past year could give way to a steady recovery for the single currency, considering the softer Dollar environment that’s expected over the coming months. With EURUSD’s major support zone now raised to 1.11, where its 50-day moving average currently lies, the pair’s upward path could push it towards 1.13, provided the current momentum can stay the course.

Read: US and China sign Phase One of trade deal, easing tensions

US-China “phase one” deal could help EU breathe easier

From a fundamental perspective, Euro investors are only too aware of the economic costs to the region from heightened global trade tensions. As a prime example, Germany’s manufacturing Purchasing Managers’ Index (PMI) contracted every month in 2019, with the domestic economy flirting with a technical recession in the third quarter.

With this in mind, the “phase one” US-China trade deal should bring some respite to the EU economy. With US tariffs set to be halved on about $120 billion worth of Chinese goods, while further tariffs on a separate $160 billion worth of imports have been shelved, this reduces the risk of more economic pain for the EU.

Read: US equities unmoved by US-China trade deal

EU members could still be embroiled in tariff tensions

However, the EU is not yet out of the woods, as member countries could draw the ire of either the US or China in the coming months. US President Donald Trump said in November that he will decide “fairly soon” about whether to impose tariffs on the European automobile sector. France also now finds itself in President Trump’s tariff crosshairs, as he threatens to retaliate against France’s digital tax that’s set to hit US technology companies. Meanwhile, China has warned Germany of “consequences”, should the latter ban Huawei from rolling out 5G services in its domestic market. If any of these threats materialize during the first quarter of next year, that would dim hopes of a meaningful economic recovery in the EU, and in turn dampen the Euro’s upside.

Read: Chart of the Week : China Credit Impulse

EURUSD could test 1.13 resistance level in Q1

From a technical perspective, EURUSD saw a golden cross in mid-December (its 50-day moving average moved above its 100-day moving average), which indicates the potential for a major rally. Barring any negative surprises, a break above 1.1224 for the pair could see EURUSD testing the 1.1306 level. The key question for sustained Euro upside will be if the EU economy can take advantage of the thawing in global trade tensions, which might allow the European Central Bank to step away from more stimulus measures. Any potential German fiscal stimulus would also be hugely positive. 

However, should EURUSD break below the 1.10 support zone, the long-term cycle low at 1.0879 will come into sharp focus. The catalyst for EURUSD’s push lower could come in the form of automobile tariffs or other punitive actions that reignite fears of heightened global trade tensions.

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