Monex: EUR/USD picks up after Powell comments on US monetary policy

25 februari 2021

EUR/USD picks up on positive market sentiment following Powell's monetary policy announcement. Below is a short commentary in English by Ima Sammani, Currency Analyst at Monex Europe on the US dollar, the euro and the British pound.

EUR

EUR/USD floated below 1-month highs for the past couple of days, but a swathe of dollar weakness this morning helped the pair to break through key levels not seen since mid-January.

On the European side, German consumer confidence printed at -12.9 vs the consensus of -14.0 and prior reading of -15.6 this morning. French consumer confidence slightly decreased this month from 92 to 91 too. Although the German GfK index increased from last month, this should be taken with a pinch of salt.

February’s consumer confidence only reversed the slide from January as near-term spending sharply dropped last month following the VAT hike in Germany. The VAT hike may drive overall consumption in next month’s reading as well via a further drop in goods spending as the income expectations index recovers from this month’s rebound.

Several ECB policymakers, including Executive Board Member Isabel Schnabel and President Christine Lagarde who stated earlier the central bank will keep a close eye on longer-term yields to ensure there is no unwarranted tightening of financing conditions.

A too abrupt increase in real rates could jeopardise the economic recovery, Schnabel mentioned during an interview on Thursday. Markets will keep a close eye on today’s speeches for further commentary on yield-watching.

USD

Yesterday was an indecisive session for the US dollar. The greenback opened in Europe broadly lower against the G10, with the exception of JPY and CHF in what looked like a traditional risk-on day for FX markets. However, once US markets opened, the dynamic shifted.

The 10-year yield rose yet again, closing 3bps higher despite rising as high as 10bps in the session, while US equities flirted to trade in the green. Initially, the dollar went bid in markets, leading to most G10 pairs retracing from session highs, while EM currencies flipped to trade in the red.

All of these market gyrations occurred while the US 10-year yield was trading at session highs, but comments by Fed Chair Powell to the House Financial Services Committee helped dampen the move in fixed income markets and take an edge off of the dollar.

Powell stated that it may take more than three years for the economy to reach the Federal Reserve’s inflation goals when questioned about rising US yields. Powell stated that the central bank will be data dependent when regarding normalisation as he gave a frank assessment of current market pricing to the committee.

This morning, the dollar trades weaker again as the Asian session passes the baton over to Europe, with the US 10-year climbing 5.5bps. Many are squaring the weaker dollar with Powell’s commitment to ultra-loose monetary policy yesterday, but the dollar dynamic may turn in the afternoon session as it has done many times over the last month.

GBP

Sterling continues trading on the front foot with GBPUSD benefiting from broad-based US dollar weakness and the lingering effects from the multiple narratives that are keeping the pound supported: doused hopes of negative rates, an aggressive vaccine rollout and a strategy to exit the current lockdown irreversibly.

Additionally, a report published ahead of the March 3 budget showed Chancellor of the Exchequer Rishi Sunak is being urged to deliver £70bn of targeted stimulus on top of an extension to the current pandemic support programmes. In total, this would add up to a record borrowing of 5% of GDP.

The report builds upon previous calls by the Institute of Fiscal Studies, CBI and Chamber of Commerce who urged for an extension of the labour market support measures. Media headlines are anticipating the labour market support schemes to be extended at next week’s budget, but until when is yet unclear.

Many are touting mid-to-end of summer, in line with the government’s reopening plans for the services sector. Ample fiscal stimulus would be in line with the US’s incoming fiscal plan, meaning that the UK chancellor may use the US plan as cover from those calling for a more conservative package should he opt to unveil a bumper package.