EUR/USD smacks higher as OECD warns about eurozone slowdown

The EUR/USD pair rose slightly even after a grim report by the Organisation for Economic Co-operation (OECD). The pair is perhaps waiting for US Consumer Price Index (CPI) data from the US and the Fed interest rate decision.

OECD warns on eurozone slowdown

A report by OECD, a club of wealthy nations, showed that eurozone will be hurt significantly by the virus. The organisation expects the eurozone economy to decline by 9.1% this year, in case of a single-hit scenario. The region’s growth will slide by 11.5% if there is a double hit.

Eurozone countries, France and Italy, will be the worst-performing members of the G7 followed by the United Kingdom. The three countries will contract by 11.4%, 11.3%, and 11.5%, respectively, in case of a single wave. Other G7 members like Canada, Germany, United States, and Japan will contract by 8%, 6.6%, 7.3%, and 6%.

The US is more vulnerable for a second wave of the virus because of the ongoing protests. Analysts say that the close proximity of the protesters and lack of protective gear could lead to asymptomatic transmission of the disease. This is worsened by the fact that most of the protests are happening in cities with many cases of the disease like New York and Los Angeles.

Among the OECD member states, the worst performers will be Spain, France, Italy, UK, Czech Republic, and Portugal. On the other hand, the best-performers will be South Korea, Australia, and Denmark.

Meanwhile, the OECD expects the unemployment rate in the euro area to increase to 10% in the second quarter and 11.1% in the third quarter. The US will have the biggest unemployment rate among the developed countries because of how the country implemented its stimulus package. Unlike countries in Europe, the US stimulus incentivised companies to furlough their employees and have them file for jobless claims. In Europe, more countries encouraged companies to have their employees in the workforce.

Focus shifts to the Federal Reserve

The EUR/USD performance will now depend on the US inflation data and the Federal Reserve. Analysts polled by Bloomberg expect that headline consumer prices declined by 0.1% from the end of April to May. They expect the rate to increase by 1.3% on an annualised basis. The core CPI, which excludes the volatile food and energy products is expected to have declined by 0.1% in May after falling by 0.4% in the previous month.

The CPI data will come ahead of the Fed interest rate decision. Analysts expect the bank to leave interest rates unchanged between 0.0% and 0.25%. They also expect the bank to accelerate its open-ended quantitative easing program.

According to the Wall Street Journal, the bank is also considering treasury yield control in a similar fashion to the Bank of Japan. The idea is that the bank would set a target for the yield of US treasuries. It would then pledge to buy these bonds at any price. In a statement yesterday, Jeffrey Gundlach, the respected money manager said:

“Obviously yield-curve control is lurking in the background of the conversation. I certainly do expect that Jay Powell would follow through on controlling the yield curve should the 30-year rate really get unhinged.”

EUR/USD technical outlook

The EUR/USD is trading at 1.1367, which is close to its March 10 high. On the daily chart, the price is significantly above the 100-day and 50-day exponential moving averages while the RSI has moved to the overbought level of 72. It is also above the 78.6% Fibonacci retracement level. This means that the pair may continue rallying ahead of the Fed interest rate decision. There is also a possibility that this decision will stop the vicious rally on the euro.