EUR/USD testing key support as ECB warns of a “sharp contraction in economic growth”

EUR/USD testing key support as ECB warns of a “sharp contraction in economic growth”

  • ECB warns of a historic contraction in the Eurozone growth amid the national lockdown measures
  • The failure to clear $1.09 yesterday invited more selling pressure as the pair trades below $1.08 today
  • A sustained break of $1.0780, opens the door for a south trip to the March lows

EUR/USD is testing the key intraweek support just below the $1.08 handle as the sellers regained control yesterday. The European Central Bank (ECB) has warned that the COVID-19 outbreak and national lockdown measures that followed will cause a “sharp contraction in economic growth”.

Fundamental analysis: ECB warns of a bumpy road

In its latest Economic Bulletin, the ECB warned that the eurozone economy is likely to shrink “at a speed and magnitude that are unprecedented in peacetime”. Its assessment range from the EU GDP contracting at least 5%, while the worst-case scenario points toward a 12% decline.

“The latest economic indicators and survey results covering the period since the coronavirus spread to the euro area have shown an unprecedented decline, pointing to a significant contraction in euro area economic activity and to rapidly deteriorating labour markets,” it is noted in the latest ECB’s Economic Bulletin.

Moreover, the ECB says that extremely low oil prices are producing a negative impact on the EU inflation while adding that inflationary pressure can decrease further on the back of the low oil prices and weak demand amid the COVID-19 outbreak. 

“In the first quarter of 2020, which was only partially affected by the spread of the coronavirus, euro area real GDP decreased by 3.8%, quarter on quarter, reflecting the impact of the lockdown measures in the final weeks of the quarter. The sharp downturn in economic activity in April suggests that the impact is likely to be even more severe in the second quarter,” it is added in the report.

Accordingly, the recovery is likely to depend on the duration of the containment measures as well as the ability of authorities to provide immediate support to businesses and economic activity. 

Technical analysis: EUR/USD testing key support

As EUR/USD failed to move above $1.09 yesterday on the broad dollar weakness, the pair rotated lower after the Fed Chairman Jerome Powell ruled out negative interest rates. This news reversed the direction of the price action, creating a failed breakout that attracted increased selling pressure on the pair. 

EUR/USD daily chart (TradingView)

Ultimately, the bears pressured the price action to trade below $1.09 this morning and test the key short-term support around $1.08. A close below $1.0780 is likely to open the door for a test of the March lows in the low $1.07. 

All in all, the price action in EUR/USD looks lively on both sides. Opening a forex demo account will help you get more familiar with technical analysis and trading processes. 

Summary

EUR/USD is trading under pressure today after yesterday’s failed attempt to break $1.09 triggered a new round of fresh selling. The pair is now testing the key short-term support below $1.08 as the EU warns of a historic contraction in the Eurozone growth. 

By Michael Harris
Specialising in economics by academia, with a passion for financial trading, Michael Harris has been a regular contributor to Invezz. His passion has given him first hand experience of trading, while his writing means he understands the market forces and wider regulation.

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