Euro struggles as dollar’s march higher continues

The euro continued to lose ground versus the US dollar on Monday, slipping below the 1.19 level to its weakest position since late-November.

The rally in the dollar has been pretty relentless in the past couple of weeks as investors react to the sharp jump in US bond yields and diverging macroeconomic data across the two sides of the Atlantic. News over the weekend that the Senate had approved President Biden’s proposed $1.9 trillion stimulus rescue package has, on this occasion, been a dollar positive given that investors are firmly focused on the impact of the measures on US Treasuries. The package is set to be voted on in the House of Representatives later today and is overwhelmingly expected to pass given that the Republicans now have full control of Congress.

With a mammoth stimulus package on the way, virus restrictions being eased and the vaccination programme going incredibly well investors think that the current outperformance in the US economy relative to most of its peers has more room to run. The euro is proving particularly vulnerable and is now trading around 3% lower than its highs from last Thursday. Data out of the bloc has continued to suggest it could be in for another period of sharp contraction in Q1 - German industrial production numbers out yesterday showed a 2.5% contraction in January. There is also a general feeling that the European Central Bank could strike an increasingly dovish tone on Thursday, with a risk that President Lagarde could express greater concern over the recent increase in government bond yields in the bloc.

Revised GDP data out of the Euro Area this morning is unlikely to rock the boat. In the absence of any surprises here, investors will have one eye on Wednesday’s US inflation numbers.

Pound remains best performer, UK vaccine supply to increase

Sterling continued to hold its own against the dollar on Monday, and remains the best performer in the G10 so far in 2021. The economic calendar in the UK this week is almost completely empty up until Friday, when we’ll receive industrial production numbers and the January GDP print. Investors are, however, continuing to place greater emphasis on the UK’s vaccination efforts than macroeconomic data. The UK has now administered at least one vaccine dose to around 32% of the population - more than five times that of the European Union. While the pace of inoculations has begun to slow in the past few weeks, vaccine supply is expected to increase sharply, with the NHS saying that supply could be set to double from 15th March.

There are now those speculating that the UK could be in a position to offer a vaccine to all adults by June, rather than the government's target of the end of July. Whether this could speed up the pace that lockdown measures are unwound appears unlikely given the cautious approach adopted by Boris Johnson’s government. The return of pupils to schools on Monday is, however, a very welcome development and the first steps in the right direction towards a full unwinding of the restrictions in the summer.