The Euro-Dollar Rate Is On Brink and Eyeing Wednesday's Federal Reserve For a Lifeline

- EUR/USD tests key support levels and needs lifeline.

- EUR is weakening and USD strengthening this week.

- As investors seek USD safety amid coranvirus spread.

- Germany confirms first human-to-human transmission.

- Coronavirus may matter to the Fed this Wednesday. 

- Commerzbank and MUFGsay more USD strength ahead.

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- EUR/USD Spot rate: 1.1005, down 0.12% today.

- Indicative bank rates for transfers: 1.0621-1.0698

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The Euro risks a breakout to the downside from a multi-month range against the Dollar even if the Federal Reserve (Fed) extends the single currency and others a lifeline through a 'dovish' policy statement on Wednesday. 

Europe's single currency weakened against the Dollar and some other rivals Tuesday even after a tentative improvement in investor risk appetites, as a multitude of concerns continued to weigh on the old continent's unified unit.

Major economy bond yields pared earlier declines in noon trading while stock markets also recovered from Monday's losses, but the only real winner in the currency space was the high-yielding and safe-haven Dollar. 

Above: Euro performance against major rivals Tuesday. Source: Pound Sterling Live. 

"We also now have a report circulating from Xinhua news agency, citing a Chinese respiratory scientist who believes the coronavirus may reach its peak in one week or about 10 days. This report is now seeing risk sentiment broadly recover into NY trade. Global equities, oil futures, the Chinese yuan and commodity currencies are bouncing," says Eric Bregar, head of FX strategy at Exchange Bank of Canada. 

China's new coronavirus has continued to spread, with one human-to-human transmission being confirmed by Germany's Ministry of Health on Tuesday.

"The corona virus has reached Germany," a ministry spokesperson has said in a statement. "[He] has been isolated, is receiving medical care and is in good clinical condition...the risk of the virus spreading in Germany is still low." 

French Ministry of Solidarity and Health press conference. January 27.

The Bavarian man is not the first confirmed case of the virus inside the EU's Shengen zone that facilitates freedom-of-movement between 26 European countries because France had already confirmed three separate cases of the highly contageous virus over the weekend. The three patients in France had all recently travelled from China, where an outbreak in Wuhan, Hubei province has morphed into an epidemic.

Coronavirus now risks bringing the world's second largest economy to something like a temporary standstill and given the strong trade relationship with Europe, Germany and other continental economies would be unlikely to emerge unscathed from any further Chinese economic woes. After all, Germany's manufacturing sector was badly wounded last year despite Europe not being directly involved in the U.S.-China trade war. 

Above: Euro-to-Dollar rate shown at daily intervals.

"The virus has spread to all but one of China's 31 provinces and has been detected in around 10 other countries," says Paraskevi Petropoulou, an economist at Eurobank. "Concerns about the risk of contagion continued to favour UST's and German bunds, while the unexpected drop in the German January Ifo Business Climate Index also helped. Along these lines, favoured for their safe-haven role, both the JPY and CHF remained firm."

The influential Ifo Institute surprised markets on Monday when it reported a deterioration of German companies' outlooks over the coming months in its January survey. The suggested strongly that current business conditions had improved but the outlook deteriorated, without saying why. January saw the U.S. and China sign their long elusive 'phase one deal' but it also saw Prime Minister Boris Johnson purport to keep a 'no deal' Brexit as an option on the table, not to mention the new coronavirus in China. 

"EUR/USD breaks its short term uptrend, extending the period of US Dollar strength/Euro weakness. We suspect that this will terminate around the 78.6% retracement at 1.0956," says says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank. "The US Dollar Index – Dollar strength remains evident and looks to extend further towards the next band of resistance at 98.37/54." 

Above: Euro-to-Dollar rate shown at daily intervals with technical indicators displayed. Source: Commerzbank.

China's National Health Commission said Tuesday that at 24:00 on January 27, it was aware of 4,515 confirmed cases of the new coronavirus, up from 291 less than a week ago on January 21. That's according to a Yandex translation of a notice on the Commission's Chinese language website. 

Authorities have declared 977 "severe cases," up from zero on January 21 and 102 on January 22. There were 106 deaths declared as of midnight Monday, up from zero on January 21 and from 9 on January 22. The Commission also said it was tracking 6,973 suspected cases, up from 922 on January 21.

"CDC today confirmed additional travel-related infections of 2019 Novel Coronavirus (2019-nCoV) in the United States, this time in Arizona and California. These patients recently returned to the U.S. from Wuhan, China, where an outbreak of respiratory illness caused by a novel coronavirus has been ongoing since December 2019. This brings the total number of 2019-nCoV infections detected in the United States to five," says a Sunday notice from the The Centers for Disease Control and Prevention.

The virus is casting a shadow over the already-troubled global and European economies, which  is a headwind for the Euro and boon for the higher-yielding Dollar. Negative interest rates and quantitative easing at the European Central Bank (ECB), combined with the Fed's 1.75% cash rate, have kept the Euro at the bottom of a multi-month range since October. 

And although Wednesday's Fed policy statement may now offer the Euro some relief, it's far from clear that this would be sustainable.

Above: Dollar Index shown at daily intervals alongside Euro-to-Dollar rate (blue line, left axis).

"They are likely to reiterate that global uncertainties still pose downside risks to their outlook for growth which the Fed can now add the potential disruptive impact from the coronavirus. At the same time, the recent data flow from the US has been disappointing resulting in Q4 GDP forecasts being revised lower towards or just below 2.0%," says Lee Hardman, a currency analyst at MUFG. "In these circumstances, we still believe that the risks are skewed towards the Fed’s next policy move being a rate cut rather than a hike, although the Fed is likely to reiterate that they remain comfortable to keep rates on hold this year."

Markets are betting the Fed delivers at least one further interest rate cut in 2020 although the bank itself has said it would require a "material change" of its outlook for GDP growth of around 2% in 2020, with near-target inflation and full employment in order to prompt any further policy action. And so far the economy appears to be delivering the Fed's forecasts on all of those scores.

The Fed's policy stance has been supportive of the Dollar but coronavirus just might qualify as a "material" risk to the outlook even if it hadn't already shown up in the U.S. - which it has - and if Chairman Jerome Powell makes that clear in either Wednesday's 19:00 policy statement or in the 19:30 press conference then the Euro might earn some respite from the selling pressures that are threatening to push it beneath a cluster of key support levels on the charts but any such respite would be short-lived. 

"A 0.25 point cut is now judged as more likely than not by the July FOMC meeting. Nevertheless, the US dollar is well poised to extend its recent advance in more risk-averse trading conditions. The US dollar is also deriving more support from the recent slowdown in the pace of the Fed’s balance sheet expansion. The rising probability of further Fed rate cuts is unlikely to derail the US dollar’s strong start to this year," Hardman says.