On Friday at 22.30 Moscow time, the US Federal Reserve issued an emergency statement on behalf of Fed Chairman Jerome Powell, which said that “coronavirus poses growing risks to economic activity” and “we will use our tools and act accordingly to support the economy.” Until the last moment, the Federal Reserve maintained other rhetoric, saying that it is too early to draw conclusions about how coronavirus will affect the US economy, and monetary policy is currently appropriate. The FRS statement on Friday fundamentally changed the situation. The Fed pawns the futures market at a Fed meeting on March 18 at 35 bp, at a meeting on April 29 at 54 bp (from the current level). Thus, translating into the system of standard lows of 25 bp, the market assumes that the rate will be lowered in March and April.

On Monday, the rally continued, with a wide front dropping to most currencies, not just the euro. The euro growth this time was not caused by the curtailment of the carry trade, but, on the contrary, by the growth of optimism – on Monday, the head of the Central Bank of Japan Haruhiko Kuroda made an emergency statement on readiness to “ensure sufficient liquidity and stability in the financial markets”. In addition, it became known that on Tuesday, finance ministers and the heads of the G7 Central Bank will hold a conference call to discuss joint measures to combat the economic consequences of the outbreak of coronavirus. As a result, the euro-dollar pair on Monday rose to 1.1183. The pair has already passed 3 pieces up from the low of February 20 at 1.0777.

In the current situation, we have to admit: our initial assumptions that the euro growth from the February 20 minimum is only a sharp but short-term correction turned out to be incorrect. At first, the euro grew against the dollar, presumably on the curtailment of the euro carry trade, although most other currencies fell against the dollar, then, already on Friday evening, the euro began to grow against the dollar on the expectation of a softening of the Fed and other central banks, as well as an increase in risk appetites .

Expectations of the Fed meeting of March 18, of course, will now put pressure on the dollar – after all, there is a serious possibility that the Fed will lower the rate immediately by 50 bp In addition, another statistic from the US came out negative for the dollar – on Monday in the US industry in February it fell from 50.9 to 50.1 against the forecast of 50.5, which further increases the chances of lowering the rate. High interest rates and high yields on American debt were the main advantages of the dollar. Long-term yields have already fallen, on US bonds – to 1.10%, and if the Fed lowers its rate, short-term yields will fall. Under these conditions, the launched anti-dollar rally may continue. We still believe that if the global economic cycle ends, the dollar will come to new multi-year highs early, but locally the pair may rise up to 1.14.

Alexey Mikheev

Head of Analytical Department, VTB Capital Forex