On the face of it, the case for EUR/USD weakness is compelling. The US
is way ahead of the EU in vaccinating its people against the Covid-19
virus, the US economy will therefore recover faster than the Eurozones
and it will tighten monetary policy first: giving the US Dollar a boost
against a struggling Euro.To get more news about
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However, markets are rarely that simple. First, the policy-making
Federal Open Market Committee made it very clear after its April meeting
that it is not time yet to even discuss rolling back its emergency
support for the US economy even though the economic outlook has
brightened and price pressures will likely increase. Indeed, while
stimulus will be slowly withdrawn in advance, market pricing does not
suggest an increase in US interest rates until the end of next year even
though US President Joe Biden is also planning a huge $1.8 trillion
fiscal stimulus package.
Yes, the European Central Bank is not expected to raise rates until
even further into the future, but market pricing has already adjusted
accordingly. Moreover, if the global market mood improves further as a
tapering of US monetary stimulus nears, the result might not be USD
strength but weakness as the currency loses its safe-haven appeal and
investors opt for so-called “risk-on” assets including the Euro.
This more optimistic tone can be seen already in the chart below of
the spread between the currently positive yield on the benchmark 10-year
US Treasury note and the still negative yield on the 10-year German
Bund, the bellwether for the Eurozone. This spread has narrowed in
recent months from more than 200 basis points to less than 190 basis
points, removing some of the advantage in parking funds in the US money
markets rather than the Eurozones.
As a result, some members of the ECB‘s Governing Council are sounding
more hawkish than ECB President Christine Lagarde, suggesting that a
debate will soon start within the policymaking body – if it hasn’t
already – about when to begin reducing its pandemic emergency purchase
program (PEPP). Note too that the German Constitutional Court has paved
the way for Berlin to ratify the EUs €750 billion recovery fund after
its judges said they had not found any indication that approval would be
unconstitutional. As the chart below shows, this has boosted EUR/USD
already but it remains well below the highs just under 1.2350 reached at
the start of this year.
More signs of a Eurozone recovery as the coronavirus pandemic is brought
under control in the area abound. France, Italy and Greece have all
moved to ease the restrictions imposed to curb the pandemic, while Spain
and Portugal have both signaled their readiness to welcome British
tourists under an EU covid vaccine certificate plan.
Further ahead, there are concerns amongst some Euro bulls about German
elections due on September 26. The fear for the markets is that the
Greens‘ candidate for Chancellor, Annalena Baerbock, could win the race
to succeed the retiring Angela Merkel. However, spread-betting companies
still favor the more conservative Armin Laschet from Merkel’s CDU/CSU
so those fears will probably prove unfounded, removing one possible
barrier to EUR/USD strength.
The Wall