US Dollar Shortage Makes EURUSD at .8500 Much Closer Than You Think

What a difference a week makes! Let’s recap:

  • COVID-19 essentially brings the United States and much of the world to a screeching halt
  • Equities and commodities plummet around the world, reminding us once again that in crashes, they only thing that goes up is correlation
  • As for currencies, though, we were reminded once again that crashes lead to a rush into US dollars

The last point is critical: the rush into US dollars has been so swift and strong that there is now a critical shortage of US dollars, to the extent that countries like South Korea are easing currency restrictions to allow a greater flow of US dollars into their economy, while excessively influential clubs like the Council on Foreign Relations are making recommendations to the Federal Reserve and supranational monetary authorities to help spread US dollars around the world.

For traders, this may create some interesting opportunities in EURUSD, the most liquid dollar-based pair. It should also be noted that Europe is now the epicenter of COVID-19, which may also impact the currency pair. In sum, the rally in the US dollar and the weakness in Europe make a case that both currencies are working to drive EURUSD down.

The chart above, a monthly view of EURUSD, helps us see the bigger picture. There is a major support level at 1.05, and a lesser support level at .95. Those are the only two barriers from a price action perspective on the monthly chart standing between here and .85. It is also worth noting that we have been in a pattern of lower highs since the 2008 financial crisis, so the momentum to .85 has been building for some time.