Monex: EUR/USD under pressure from rising US 10-year yields

Monex: EUR/USD under pressure from rising US 10-year yields

22 februari 2021

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This is a commentary by Ima Sammani, FX Market Analyst at Monex Europe.

EUR

The euro initially started the session trading flat against the strengthening dollar but lost ground over the course of the morning as USD strength began to overwhelm the single currency. While the UK is getting more clarification on the lockdown exit strategy today, it seems like this will be a longer shot for the eurozone as vaccine divergences remain large, although the pace has started to pick up. In 10 out of 16 German states, schools and daycares will reopen for the first time in weeks today. German health minister Jens Spahn said the country will evaluate the impact of today’s return to school for some children before considering any further easing of measures. “Once we have firm footing, we can take another step”, he said in an interview with ARD television. Hairdressers are set to reopen on March 1, and further easing is tied to the local seven-day contagion rate being lower than 35 per 100,000 people. German 10-year Bund yields hit a fresh 8-month high this morning following anticipation of stronger economic growth and inflation in the coming months after the US markets led with reflation trade, setting the tone for trade in European bond markets as well.

USD

The dollar has started today’s session in the green to mark a reversal of the previous two-day decline without risk sentiment being much of a driver this morning. US 10-year Treasury yields continued to climb higher to reach a 1-year high, supporting the dollar, while anticipation of increased inflation remains evident as markets price an acceleration in the economic recovery given the expected spending package by President Joe Biden. According to the CBO, the stimulus package heading for a US House vote this week slightly exceeds the initially proposed $1.9tn, with congressional Democrats having to cut the plan down by £41bn before the bill can pass the Senate. Federal Reserve Chair Jerome Powell is due to speak at Congress this week and will likely reiterate that the Fed is fully committed to supporting the economy, with the labour market being far from the Fed’s full employment target and inflation far from the 2% target.

GBP

Sterling is trading roughly flat against the dollar this morning despite the greenback strengthening across the board this morning, putting the pound near the top of the G10 pile this morning. Over the weekend, the UK Prime Minister’s plans to reopen the economy have gripped the media cycle, with many touting March 8th as the date when schools are set to return. Along with the reopening of schools, restrictions are set to be eased at the margin elsewhere with dedicated visitors allowed into care homes and outdoor picnics allowed. Johnson concluded this weekend that his four tests were being met and the lockdown easing plan, which itself is split into four steps, will start in two weeks. All easing is currently predicated on data - especially virus transmission - and the scaling back of lockdown measures may be delayed, however.

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