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Euro holds its own despite fears over third wave in Europe

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13 April 2021

Written by
Matthew Ryan

Matthew Ryan is Ebury’s Global Head of Market Strategy, based in London, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

Action in the FX market has been relatively limited in the past few trading sessions, causing most major currencies to trade within a relatively narrow range.

T
he euro has continued to remain remarkably resilient. On the surface, it would appear as though the balance of risks to the common currency are skewed considerably to the downside – the bloc is battling against a third wave of infection, its vaccine rollout has been sluggish and restrictions have been imposed across much of the continent. Germany, in particular, appears to be going through a tough time, with Chancellor Merkel warning on Monday that the third wave may be the toughest of the lot, with a growing number of younger people being hospitalised and admitted to ICU.

Investors have, however, so far largely turned a blind eye to the ongoing turmoil. The situation is undoubtedly improving in many countries in Europe – the ‘R’ rate in Italy, for instance, is now back below 1 and around its lowest level since early-December, as is the case in France. We are also beginning to see signs of an improvement in economic data out of the Euro Area, with a handful of releases surprising to the upside in the past few days. Monday’s retail sales figures for February came in better-than-expected, with sales up by 3% month-on-month versus the 1.5% expected. While the near-term outlook is less than favourable, the downturn experienced in the first quarter may not be as bad as first feared, which is helping to support the euro.

Investors eye US inflation data, pound stabilises after sell-off

The past few trading sessions have been largely void of major market moving news, although the next few days should be a bit different. US retail sales and inflation data will be released on Tuesday and Thursday respectively. Given the impressive pace of vaccinations in the US and the disbursement of President Biden’s stimulus checks, consumer spending could blow through expectations this week, which may further support the narrative that the US economy is set to far outperform almost all of its major peers in the near-term. Inflation data this afternoon will also be important. Economists are eyeing a sharp move higher in the headline number to 2.5% year-on-year and it will be interesting to see whether this triggers the market into pricing in a greater probability of higher US rates over the next twelve months.

Meanwhile, sterling traders will be looking towards a couple of speeches from Bank of England members Haskel and Cunliffe this week. The pound stabilised following its recent sell-off yesterday, partly a result of the general optimism surrounding the easing of lockdown measures in the UK yesterday, which included the reopening of pubs, restaurants and gyms. Manufacturing and industrial production numbers also surprised to the upside in February, and there was an upward revision to the January GDP print, albeit the February number missed expectations (0.4% vs. 0.6%). The rollout of the Moderna vaccine in England today is also an encouraging development and supports the view that the UK will meet its vaccination targets and unwind all lockdown measures by mid-June.

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