One of the most interesting things to watch during the coronavirus pandemic has been the EURUSD’s reaction. The most important currency pairs of the FX dashboard, and the most popular among retail traders, rose more than a thousand pips in the last four months.
It stopped at 1.1915, just shy of reaching the psychological 1.20 level. Such a steady rise was supported by developments on both sides of the Atlantic, creating perfect conditions for a squeeze higher.
European Recovery Fund
The news that the Europeans prepared to tackle financial markets with joint debt issuance triggered the EURUSD move higher. The market was caught on the wrong foot as the EURUSD lagged the price action seen in other USD pairs. But by the time it began its move higher, it did not stop all the way to 1.19.
Also, Europe was viewed to be handling the coronavirus outbreak better than the United States. This triggered another round of flows into the common currency, fueling the rally further.
Fed Holds the Key
However, it is the Fed who holds the key to further EURUSD appreciation or not. Ultimately, the Fed’s USD swap lines calmed financial markets. As the USD liquidity improved, it became obvious to everyone that the Fed would do anything in its power to calm the market participants.
Now the Fed said it keeps the USD swap lines open. Even if there is no effective need for them, they remain open only to remind market participants that a backstop exists. Hence, the relentless selling of the USD is explained by the literally unlimited USD availability.
In the four months since the pandemic reached the Western world, each day brought some new developments in the fight against the disease. Last week, Russia registered its first vaccine. Still last week, the European Commission announced that it reached an agreement with AstraZeneca, a pharmaceutical company, for the acquisition of 400 million doses of the upcoming and promising vaccine currently under development.
Until a breakthrough is reached, the market focuses on the number of daily cases. At a time when the cases in Europe declined, the ones in the United States kept moving higher. EURUSD rose all that time.
Now that Europe faces a second wave of infections, the infection rate slows down in the United States. Will the EURUSD rate turn South?