The EUR/USD currency pair showed signs of weakness overnight as the impact of the terror attacks weighed heavily on speculative sentiment. The greenback maintains its status as a safe haven currency in times of geopolitical turmoil, and this was evident when it rallied against the EUR to 1.1180 overnight. However, the EUR fought back and is slowly edging towards 1.1200. Sentiment in global equities markets soured from Asia Pacific to the Atlantic seaboard. Trading in Asian markets was notably subdued following the terror attacks in Europe, and stocks on Wall Street also showed weakness. In the aftermath of the Brussels bomb blasts one of the surprise gainers was the US dollar index. It reversed course on the back of comments from policymakers at the FOMC that April rate hikes could be a reality. The greenback, which reacts positively to interest-rate hikes, immediately rose against a basket of currencies and this is evident from the US dollar index as shown below.
Naturally, any rise in the US dollar index is going to be bad for the EUR/USD currency pair and traders will want to go short on the EUR in this instance. The dollar is functioning in much the same way as gold in times of geopolitical uncertainty or high volatility. The USD is perceived as the world’s safe haven currency, particularly since Europe was hit by the terror attacks and currency traders re-routed their investments out of Europe and the UK towards the US. The currency pair dropped 0.25% when it reached 1.1189 and at the time of writing it is trading at 1.1172 for a much steeper loss of 0.40% for the day. In fact, the currency pair opened at 1.1217 and hit a low of 1.1166. This is still markedly higher than the 52-week trading range for the EUR/USD pair which posted a low of 1.0521 and a high of 1.1714.
In order to gauge where the EUR/USD currency pair is going in the coming days, it’s important to take a step back and look at the performance of the USD against global currencies. There is no doubt that the Fed decision on March 16 was bad for the USD over the short-term. At that point, the status of the global economy was precarious and thoughts of an interest-rate hike in the US were not conducive to strong growth for the global economy. The Fed followed in the footsteps of the Bank of England and opted instead to maintain rates at their current level of 0.25% – 0.50%, with the possibility of 2 interest-rate hikes before the end of 2016. When the Federal Reserve Bank decides to raise interest rates, it is in fact giving itself more leverage in the event that the economy turns south. By having more of an interest-rate cushion to play with, it can adopt more effective monetary policy by slashing rates when the economy sours. For now, however the interest-rate cushion is rather limited and Fed decisions have a largely muted effect when the rate hikes are so small.
