Monex: EUR/USD drops as the ECB looks deeper into the euro’s appreciation against the dollar

Monex: EUR/USD drops as the ECB looks deeper into the euro’s appreciation against the dollar

Currency
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This is a commentary by Ima Sammani, FX Market Analyst at Monex Europe, on the USD, EUR and GBP exchange rates.

EUR

After having rallied against the US dollar throughout most of yesterday’s trading session, the euro stabilised its course overnight and this morning following headlines that the European Central Bank has agreed to look deeper into the euro’s appreciation against the dollar since the start of the pandemic, as dollar weakness despite a stronger US economy remains a puzzle according to officials familiar with the matter. The euro’s strength over the past year contributes to inflation that already sits below zero and does not help the ECB’s emergency stimulus that consists of a €1.85tn bond-buying programme and a series of ultra-cheap long-term bank loans, as the impact of monetary stimulus weakens as the currency strengthens. The news made the euro hand back some of its gains from earlier in the day, while weakened prospects of a eurozone recovery are likely also weighing on the currency. The International Monetary Fund downgraded the growth outlook for 2021 across Europe and underscored a generally poorer performance compared with China and the US, as the euro-area economy is a persistent laggard. A slow roll-out of vaccines, uncertainties over Germany’s next political leadership and a crisis in Italy are not helping the short term outlook either. However, there remains some cause for optimism once enough people are vaccinated and lockdowns can be fully lifted, as the euro should still benefit from the global economic recovery given its procyclical nature. 

USD

Positive headlines in yesterday’s session saw the dollar trade lower after an elevated start to the European session. A combination of Pfizer stating it would deliver US vaccine doses faster than expected and the IMF upgrading its forecast for global growth resulted in the dollar taking on water, as market participant’s attention shifted to interesting developments in equity markets as a few individual stocks showed parabolic returns linked to threads on a popular Reddit page. This morning, however, FX markets are much more subdued ahead of what could be a pivotal Federal Reserve meeting at 20:00 CET. While most expect little additional information from the US central bank, recent commentary by regional Fed presidents means the topic of QE tapering is likely to be addressed at a formal level tonight. However, we don’t expect Chair Powell to deviate too much from his recent stance; that it is too early to discuss the exit. A simple communication error could prompt substantial volatility in all markets tonight though, but we deem this a small event risk for markets in general. 

GBP

Despite trading on the back foot in the early part of yesterday’s trading session, sterling managed to collect itself to post a 0.46% rally over the course of the day. The turnaround in market sentiment wasn’t driven by an individual factor, but a general tone of positive news headlines coming in throughout the day. Comments from government officials in the UK suggested that the UK vaccination programme remains on course for schools to reopen on February 22nd and for measures to be reassessed in early March. Meanwhile, overnight the news broke that the UK will require mandatory quarantining from travellers entering the UK from 30 listed countries. With progress being made to further shield the UK economy from an uptick in case count, the pound made good progress as the overall risk environment improved. Today, with little data out apart from this morning’s BRC shop price index for January, which showed a further contraction in retail prices of 2.2%, the focus will be on global events along with the domestic political calendar.