Expert Investor
Author: Mauricio Carrillo
Senior Reporter
Mauricio Carrillo

Dovish Sentiment on COVID-19; USD Down, EUR And Gold up

The dollar extended declines the last day of the week as investors remain worried about the impact of the coronavirus outside of China in both economic and health matters. Traders are focused on how central banks and governments react to the situation.

In that framework, risk aversion is taking control of the investment markets and traders are flying to bonds, pushing their yields to historical minimums, and raising concerns about a possible recession in the middle term.

Coronavirus Surpasses 100,000 Confirmed Cases

Coronavirus map

According to the data compiled by the Johns Hopkins University, the number of coronavirus COVID-19 confirmed cases reached 102,471 people by Saturday, March 7. The number of persons who died rose to 3,491, while the number of patients who recovered is 57,463.

The alarm is going off worldwide with school and university classes being suspended From Australia and Italy to California, and companies canceling events, asking their employees to work from home, and announcing they will not match revenue expectations.

With the advance of the virus, investors have become more and more worried about its impact in the global economy, and they are buying safe-haven assets such as US bonds and gold.

US Bonds Trade at Historical Lows, Dragging Dollar Down

A sample of that is the performance of US 10-year bonds this week. Yields fell below the 1.000% level for the first time and extended declines to a historical low of 0.657 on Friday.

The decline in the benchmark bond is also propelling speculations the Federal Reserve will be forced to cut interest rates and even move the country for negative rates like the ones that are in place in Europe and Japan.

These speculations are driving the dollar down. On the week, dollar closed 2.07% negative, its worst week since May 2017.

EUR/USD Closes The Best Week Since May 2017

EUR/USD chart

On the other hand, the euro is taking profit from the dovish dollar situation. After reaching its highest level since July 2019 at 1.1355 on Friday, EUR/USD closed the week with 2.33% gains, its best week since May 2017.

The reason is again the speculations for rate cuts in the United States. Therefore, the reduction of interest rate differentials between the euro and the dollar.

The daily chart looks bullish for the EUR/USD with 1.1350 first, and 1.1400 later, as the most natural outcome in the short term.

In that framework, analysts at MUFG Bank point out that euro would rise further if the ECB doesn't ease expectations. "The next key resistance level is provided by the intraday high from the 25th June 2019 at 1.1412."

The bank adds, "there is clearly a heightened risk that the EUR's rebound will extend in the near-term driven by the liquidation of funding positions with more-risk-averse trading conditions likely to continue."

Gold at Highs Since January 2013

Dovish Sentiment on COVID-19; USD Down, EUR And Gold up

Finally, all stories lead to gold. The metal closed its best week since August 2011 with a 5.52% rally and close to 1.692, 3-year highs.

XAU/USD is one of the primary beneficiaries of the current situation given its status of safe haven but mostly because of its condition of a safe investing asset. Besides a safe haven, investors look for the asset that is better positioned to perform well. The answer is clear: Gold.

The blend of potential low-interest rates, concerns about recession, plus a declining dollar is fueling gold prices. Also, let's not forget about the ongoing trading war.

Recently, BoA analyst Michael Widmer said that coronavirus impact could push gold prices to 2,000. However, his bullish view on gold goes beyond coronavirus. "Indeed, we believe that the yellow metal is supported by several structural, i.e., longer-term, dynamics."

Keep 1,700, 1,750 and finally 2,000 as key levels to watch.

Meet The Author
Mauricio Carrillo
Mauricio Carrillo
Senior Reporter

Mauricio is a newer member of the team and a very welcome addition. He is a financial journalist and trader with over ten years of experience in stocks, Forex, commodities, and cryptocurrencies. This experience means he has an excellent understanding of the markets and current events.

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