Monex: Optimism regarding US fiscal stimulus influences EUR/USD exchange rates.

February 2, 2021

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

EUR

The euro is holding steady this month’s lows against the dollar after having fallen 0.73% throughout yesterday’s session, and with risk sentiment slightly improving overnight and today, the pair is likely to remain supported above current levels. Change in unemployment in January more than doubled in Spain since the December reading despite lockdown measures being looser there than in other eurozone countries, painting a dark picture for other euro area unemployment figures this month. Q4 GDP figures from Italy showed a contraction of 2% this morning, matching the consensus. With other GDP data from the eurozone having surprised to the upside yesterday, risks to the eurozone GDP number at 11:00 CET are tilted to the upside. With no definitive news yet about the formation of a new government, Italian bond yields are little changed since yesterday. Prime Minister Conte is set to report to President Mattarella today with talks aimed at forming a coalition and avoiding early elections. Any failure would likely see an immediate jump in Italian bond yields and widened BTP-Bund spread. Euro traders will continue to focus on Italian politics today while also keeping a close eye on any vaccine distribution headlines. 

USD

The dollar, which often has a negative correlation with improved risk appetite, rallied alongside US equities, US Treasury yields and commodities in yesterday’s session. An improvement in the final reading of the January manufacturing PMI along with a robust reading in the ISM manufacturing data showed the US economy continues to recover as price pressures build. Further focus remains on US fiscal stimulus, with President Joe Biden and congressional Democrats signalling their intent on a large pandemic bill and moving forward with plans for budget reconciliation. Congress reported in a joint statement that yesterday’s White House meeting was productive, however, House Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer introduced a budget resolution on Monday, which is required to go through with budget reconciliation. Reconciliation is a lengthy process that requires significant groundworks laid out, but would allow much of Biden’s $1.9tn stimulus to pass the Senate with only 51 votes rather than 60 votes. Congress has agreed to continue negotiations on a bipartisan relief plan in the meantime, hoping that they would still be able to reach an agreement. In terms of vaccinations, data showed 26.5 million Americans had received at least one shot, which boosted risk appetite along with the talks on additional fiscal stimulus. 

GBP

After staving off attack in the morning of yesterday’s session, sterling finally succumbed to the dollar bid and slipped to close the day out in the red. Open-to-close, GBPUSD fell a third of a percentage point, but fared much better against the euro as it rallied 0.31% over the course of the day. Developments in the UK yesterday saw the government push ahead with plans to conduct blitz testing of 80,000 people in eight areas including parts of Kent, Surrey, South London, North London and Southport, in an attempt to unveil how many cases of the South African Covid-19 variant are active in the population. The move by the government comes after 11 cases of the more infectious variant were found with no link to foreign travel. Concerns over this strain becoming the more prominent in the population are rising as data suggests the current vaccines in distribution are less effective against it - a dynamic that could further push back the timeline for the UK economy to reopen. On the economic data front, January’s final manufacturing PMI reading saw an upwards revision from 52.9 to 54.1, a sign that the UK economy is faring better in lockdown than previous. Today, with little on the data front, sterling trades higher as the broad USD bid begins to unwind against the G10.