Euro Rally May Prove Fleeting With Dollar Headwinds Priced In

The euro had its best week in more than a decade and that may be as good as it gets. Further gains could be hard to materialize asmarkets stabilize, with the dollar’s headwinds now largely priced in.

Options traders see a near-term advance for the greenback, which often acts as a haven during crises, with the pandemic still raging. Meanwhile, the technical picture for the euro has become nuanced, with Fibonacci levels suggesting rallies may be capped, even as the relative strength index and Bloomberg’s fear-greed indicator hint at further gains.

Add that quarter-end flows are seen as greenback-supportive and that liquidity at the end of the month could suffer given that many traders are working from home, and the euro’s rise may come to an abrupt end. The U.S. currency may gain as sizable orders are expected to support until Tuesday, according to two traders in Europe, who asked not to be identified because they are not authorized to speak publicly.

European leaders’ struggle to agree on a concrete strategy to contain the fallout from the deadly coronavirus doesn’t help those looking for another euro rally either. The bloc is once again facing the divisions that almost tore it apart during the sovereign debt crisis and credit-default swaps covering German government bonds may rise further, a development that historically pressures the currency.

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  • Dollar Towers Above All in Pandemonium Even Havens Can’t Handle
  • Europe’s Leaders Are at Loggerheads Over Coronabonds: Map
  • Pound Traders Bet Against U.K. ‘Laissez-Faire’ Response to Virus

The euro may also have little to gain from America’s own “laissez-faire” moment. The U.S. is the first country to reach 100,000 coronavirus cases, which follows President Donald Trump’s comments this week that he was looking to take back some of the restrictions on work, commerce and social interaction that are already in place. Investors have shown a tendency to move away from currencies when the infection rate starts growing exponentially and governments are seen a step back in tackling the crisis, yet that repricing may be already complete.

The common currency ended Friday at $1.1141, 1% stronger on the day and up 4% on the week. Technically, it stayed above a key quarterly support at $1.0666 last week and now eyes a pivotal Fibonacci retracement level at $1.1167. Risks reversals, a barometer of market positioning and sentiment, show investors are willing to pay a hefty premium to own upside exposure in the dollar and thus the euro may meet fading interest on rallies toward $1.1200 handle.

  • NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

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