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EUR/USD runs up fresh highs to mid 1.10 handle as US economy falls over a cliff

  • EUR/USD picking up the bid as the dollar falls below the 100 handle in a dire economic backdrop.
  • COVID-19 vaccine needed or volatility is here to stay and global recessions are unavoidable. 

EUR/USD is now trading in the midpoint of the 1.10 handle, extending the rally as the US dollar backtracks below he 100 handle in the DXY following the rate of jobs being shed in the United States. The outlook is bleak for the US economy and with central bank coordination, there is less of a squeeze in the dollar and investors are starting to see through the cracks of the mighty dollar.

Firstly, to address the jobs situation, we the initial jobless claims numbers have run up a massive 3.283 million which is worse than at the peak of the financial crisis, but this has happened overnight and will only get worse. The US death toll hit 1000 pertaining to the COVID-19 outbreak, fear and panic have set in, States are on lockdown, business is closed and there is no light at the end of the tunnel at this stage.

While the US Senate finally approved a $2 trillion fiscal package to mitigate the fallout from the coronavirus crisis, with The House set to follow suit on Friday, but some say that Congress is “not doing enough," according to at least to Nancy Pelosi speaking in a press conference.  "We have to do more. We can go bigger, especially now the interest rates are even lower than at the time of the tax scam...it’s like I gave you a dime for a cup of coffee. It doesn’t cost a dime anymore. There’s a cost much more. Let’s recognize that reality."

What is going to happen to the US dollar when this liquidity squeeze is over? 

US Dollar Index tumbles to weekly lows near 99.80

We are in a period of unlimited Federal Reserve QE and overnight, Chief J.Powell has gone and left the door open for extra easing in case the outlook deteriorates further while emphasizing the readiness of the Fed to step in if credit flows struggle. As markets get an excuse to bid up the stock market, that will continue to hurt the US dollar that had otherwise been enjoying a recent run of safe-haven status. However, the fear here is that any upside correction in stocks will be short-lived and there will be little demand for the US dollar as it is being printed into oblivion with interest rates at zero and purposely made readily available in interbank money markets and swap lines. What is going to happen to the US dollar when this liquidity squeeze is over? 

Meanwhile, the cases of COVID-19 in the eurozone is crippling the economy and given the size of the economic shock, the European Central Bank and governments will have no choice but to move into very uncomfortable territory and do much more. Over the last few days, eurozone policymakers have started to design a much more serious response, although there's little coordination between eurozone member states which can weigh on the euro and cap its advance in its tracks – financial pledges are simply not enough to keep up with the contagion of the virus throughout Europe.

All in all, its a milkshake of extreme volatility which could be here to stay with wild swings in FX. With a global slowdown, there is going to be less money changing hands internationally which means less liquidity and wider spreads and ranges in FX and money markets. On the other hand, given the measures already taken and USD funding situation improving, the abrupt and seemingly irrational FX moves may decline vs the dollar. The situation remains fluid, and the announcement of a COVID-19 cure and vaccine is what the markets and world economy really need.

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