11 March 2021
The euro traded higher against its major peers on Thursday, rallying back to its strongest position in almost a week versus the US dollar. Attention in the market today will be firmly on this afternoon’s European Central Bank meeting, which could present the biggest event risk to currency markets this week. With much of Europe still enforcing strict virus restriction measures and the economy on course to enter into a double-dip recession in Q1, the tone of communications is likely to remain a dovish one. President Lagarde will be unveiling the bank’s updated macroeconomic projections that, given the sluggish vaccine rollout in the bloc, are unlikely to show much optimism over the near-term outlook. We are, as a result, bracing for a downward revision to both growth and inflation forecasts for 2021. The main focus among investors will, however, likely be on the bank’s comments regarding the recent action in bond markets. Unlike the Federal Reserve, ECB members have voiced increased concern over the recent move higher in government bond yields, saying that action may need to be taken in order to calm the situation. This would likely come in the form of an increase in the pace of bond purchases under the bank’s PEPP - there has even been talk that the ECB could extend the end date of the programme beyond the March 2022 end date. While we think that it is unlikely we’ll see either of those measures announced this week, we think that Lagarde will at least attempt to verbally talk down interest rates and indeed the euro. The move higher seen in the common currency in the past 24 hours or so may, therefore, merely be profit taking ahead of another possible move lower.
US core CPI falls in February, easing global inflation fears
Much of the rally in EUR/USD yesterday had to do with US dollar weakness, with the greenback down against most of its major peers. US inflation data fell short of expectations on Wednesday, which may have been behind some of the move lower. The headline rate increased to 1.7% year-on-year, although the core level, which strips out volatile priced components such as oil, slipped back to 1.3% in February from 1.4%. This has helped eased concerns that the global economy could be set for a sharp jump in prices once virus restrictions are unwound in the coming weeks and months. Meanwhile, President Biden’s $1.9 trillion stimulus programme cleared through Congress without a hitch, paving the way for large-scale stimulus to be made available to households and businesses. Biden is expected to sign the bill on Friday, with the $1,400 stimulus cheques for households likely to be distributed within a matter of days. Investors have generally cheered the outcome, albeit it was largely priced in a while ago. That being said, stocks have risen, with the S&P 500 index up modestly so far this week. The news of more US stimulus has been largely a US dollar negative in the past few months, but with investors now trying to gauge its impact on pushing up US Treasury yields, the reaction in the greenback has been mixed. For now, we think that further short-term advances in the currency could be on the cards, provided the Federal Reserve continues to turn a blind eye to the rise in long-term rates. This stance should become clearer next week, when the FOMC convenes for its March meeting.
