Euro strengthens as Coronavirus causes chaos in the markets

Feb 28, 2020

The volatile week in markets has continued today as fears of the spread and impact of the Coronavirus continue to grow.

These fears have led traders to seek traditional safe-haven assets and consequently US treasury bond yields have been dragged to record lows. Stock markets have also been pummelled this week with the biggest weekly drops seen since the financial crisis (>10%). Markets are now speculating the Federal Reserve may cut interest more aggressively (possibly up to three times this year) to help offset the impact the virus might have on economic growth. This has made the USD less attractive for now.

Furthermore, traders have been unwinding short Euro positions on carry trades (where investors sell currencies with low interest rates and invest in higher interest currencies to make profit) which has caused the Euro to be re-bought. 

All of this has led to stronger demand for the Euro which has pushed the EUR/USD rate up to a 3-week high and dragged the GBP/EUR down to a 3-mth low (which has fallen around 3% this week). 

The markets had been relatively relaxed about the coronavirus outbreak up until this week. But, after it hit Italy this week and some other new regions, traders have been waking up to the potential drag the virus might have on global economic growth as supply chains and business activity are interrupted. It’s a little early to tell if this has been an overreaction as our understanding of the scale of this disease is still unknown. Markets will be keeping a very close eye on any fresh developments on the virus saga which should continue to infuse some volatility in the FX market.