EUR/USD: Downside risks as COVID-19 continues to spread in Europe – MUFG

The scope for a USD correction stronger remains rooted in the continued spread of COVID globally relative to the US. EUR/USD, which plunged on Wednesday to 1.1850 from near two-year highs of 1.1956, has benefitted from a relatively positive outlook for growth driven in part by COVID improving relative to the US. That is no longer the case and has the potential to undermine the euro over the coming weeks, per MUFG Bank.

Key quotes

“The spread remains notable in the US but the direction of travel at least shows a slowing of the spread. The 7-day average of the daily change in COVID cases in the US continues to drop notably, falling from a peak of 67k on 22nd July to 47.5k as of yesterday. That’s in sharp contrast to the situation in Europe.” 

“The largest European countries impacted by COVID have seen the 7-day average daily increase in COVID move from 2.4k on 14 July to 12.5k on Tuesday. The impact of this is not yet evident in the official economic data but the high-frequency figures show a clear flattening of activity – this will undoubtedly come through in the official data.”

“Spain is worthy of particular mention here. There were 3,715 new cases reported yesterday, that’s the highest one-day increase since 23rd April. Elsewhere the outright increases are relatively small but the direction of travel is a concern. In Italy, there were 642 new cases yesterday, the highest total since 23rd May. Increases in Germany resulted in Chancellor Merkel suspending any further relaxing of restrictions.”

“Market participants will become increasingly sensitive to further evidence of spread and until we see these trends in Europe turn lower again, the risk/reward for EUR is set to remain skewed to the downside.”