ost of the European continent is now either already in the midst of a third wave of infection or bracing for one in the coming weeks. With vaccine progress painfully slow compared to the US and UK, nations within the EU have not yet vaccinated anywhere near enough of the population to withstand a rise in caseloads without incurring an increase in deaths or needing to tighten restrictions. Germany has become the latest country to reintroduce tougher measures, reversing its plans to gradually reopen the economy and extending its lockdown until at least 18th April. New cases and deaths there have not yet taken off, but the sharp increase in the ‘R’ rate to above 1.3 (its highest level since early-November) is a big cause for concern. Germany’s Bundesbank has stated that the country’s economy is on course to contract sharply in Q1, but that will hardly come as a surprise to market participants.

All the while, political squabbling surrounding the distribution of the AstraZeneca vaccine continues to rage on. The EU has got to the stage where it is even threatening to block exports of AZ vaccine shipment produced within its borders to nations that have a vaccine rollout considerably higher than itself, i.e the UK. EU leaders are said to be against this proposal ahead of a summit scheduled for Thursday, so in reality this appears unlikely to come to pass. Regardless, the bloc’s overall handling of the vaccine rollout in general has been a poor one and with confidence in the AstraZeneca jab lower than ever, it is likely to take some time before any degree of immunity is built up within the population.

Sterling slides below 1.38 as AstraZeneca row continues

Despite the clear downside risks facing the euro, the common currency continues to hold up remarkably well around the 1.19 level versus the dollar. The same can’t quite be said for sterling today, which has dropped by around half a percent against the USD to its weakest position since early-February. The ongoing row surrounding AstraZeneca shipments is undoubtedly providing a cause for concern, as is Boris Johnson’s comments from Monday that Europe’s third wave was likely to wash up on the UK’s shores in due course. The ace up the UK’s sleeve is that it has now administered at least one vaccine dose to 40% of the population (around half of all adults) – more than four times the same number in the EU. This gives the UK a much better chance of withstanding an increase in infection without needing to tighten restrictions or delay reopening.

Attention in the FX market today will be largely centered around a Congressional testimony from chair of the Federal Reserve Jerome Powell. At last week’s FOMC meeting, Powell once again seemed unconcerned with the recent increase in US Treasury yields, and the market is expecting much of the same today. US yields have actually begun to retreat from their highs in the past few days, which takes the pressure off Powell to some extent.