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Chart of the day: EURUSD

The euro extended its rally to 1.1170 on Tuesday after the Federal Reserve cut the benchmark rate by half a percentage point to a range of 1%-1.25% in its first emergency move since the GFC, sending the US 10-year Treasury yield below 1% and crashing the US dollar.

The EURUSD came off the multi-year low of 1.0783 seen on 20 February and has gained almost every single day since, thanks to the broad weakness of the USD and unwinding carry trade given the higher volatility.

The pair is now firmly running above the 10-day EMA, with RSI just running into the overbought area. The upside move is capped by the long-term descendant trend line coming from January 2019. A breakout here will pave the way to 1.12 followed by 1.2339/49 area. On the flip side, 1.0990 is the key support level, which was tested a couple of times during October and January.

EURUSD chart

ECB president Christine Lagarde joined her counterparts, expressing that the central bank is ready to take “appropriate and targeted measures”, despite being reluctant to further cut rates into negative territory. The market has priced in an 86% chance of 25bp cut in the 12 March meeting. Meanwhile, fiscal stimulus and more bond purchasing are being discussed. The EUR would be under pressure should we see these actions come in effect.

Italy is our focus. It’s worthwhile to see the chart below, where the white line represents the yield spread between the 10-year bond of Italy and Germany. Yellow refers to EURUSD.

White: Italy 10-year bond yield - Germany 10-year bond yield. Yellow: EURUSD
EURUSD chart
"Source: Bloomberg"

With the death toll climbing to 79 and the total number of infected 2502, investors are therefore running away from Italy’s bond market on the concern of looming recession in the first quarter, causing the increasing yield spread relative to the German bund (white line goes up).

The chart speaks for itself. EURUSD usually declines when the yield spread widens. Will the pair reverse its current trend this time?

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