Monex: Hope for strong fiscal stimulus and lower COVID-19 infection rate in US affect EUR/USD

Monex: Hope for strong fiscal stimulus and lower COVID-19 infection rate in US affect EUR/USD

8 februari 2021

Valuta
Corona-virus (05)

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

USD

The US dollar ended the week on a weaker note than where it started as a weak US jobs report on Friday underscored the need for more economic aid, sending the dollar lower against G10 peers. Upon open, the greenback began to pare back Friday’s losses as comments from Treasury Secretary Janet Yellen touted Joe Biden’s $1.9tn fiscal plan when she said the US can return to full employment in 2022 with the help of a robust stimulus package. Without it, she told CNN, it could take until 2025 for the labour market to recover. On rising expectations over US stimulus, along with continued optimism over vaccines, the pace of inflation implied by the bond market rose to its highest level since 2014, with the 10-year breakeven rate widening to 2.21%.

EUR

The euro buckled under the pressure of USD demand last week and dropped over 1.50% from weekly high-to-low before Friday’s jobs data from the US showed much of the labour market is still frozen, reversing the trend and allowing EURUSD to recover about half of its earlier losses of the week. This morning’s trading saw the EURUSD recovery stall above key levels as markets reacted to the passage of a fiscal stimulus resolution in the US. On the euro-area side, Italian politics remain in focus as former ECB Chief Mario Draghi will start a second round of talks with parties today on the formation of a new Italian government, after he won initial backing of some of the biggest political parties over the weekend. Italian BTP yields dropped closer to record lows upon the news that Draghi secured support from different parties across the nation. If today’s talks go well, Draghi could announce his government picks this week before facing confidence votes in parliament, giving room for BTP yields to drop further.

GBP

After joining the G10 rally against the dollar on Friday, sterling continues to cling near recent highs against the dollar and its 9-month high against the euro this morning, despite broad based USD strength returning to G10 FX. Over the weekend, developments in the UK were rather muted, as the focus remains on the speed of vaccine distribution. The U.K. is on track to vaccinate all people over 50 by May and is already planning a program of top-up immunisations to fight new variants from the autumn according to ministers. This comes at a time where the government is aggressively trying to track the outbreak of the latest South African variant in the UK which hasn’t been linked to travel to the region. Such concerns are in place for a reason after South African officials stopped distributing vaccines by Oxford/AstraZeneca over the weekend due to their limited efficacy against their local strain. With the distribution of vaccines continuing at a fast pace, the focus now hinges on vaccine efficacy in the UK, which new strains could undermine as they did in South Africa. However, this hasn’t caused enough concerns for sterling traders to sell the pound at a rate that isn’t fitting with the broad G10 dynamics at present.

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