Markets and the dollar have priced in a strong US economy to lead the EU and the world out of the pandemic. While some degree of recovery is certain, how powerful is very much in the air. Growth will be affected by US economic policy, taxes, politics, and still, the pandemic. Join FXStreet senior analysts Yohay Elam and Joseph Trevisani for an assessment of the current risks and prospects for the year.

Yohay Elam: So, ten-year yields are below 1.60% after hitting 1.77% and the dollar is stronger. The correlation seems broken, even if yields are still high. Is it end-of-quarter flows?

Joseph Trevisani: I think not, at least in Treasuries.

Yohay Elam: There's a week left until the quarter ends, so I tend to agree.

Joseph Trevisani: Today's claims numbers were the first below 700,000  in the pandemic era, which at least seems promising.

Yohay Elam: That explains the stronger dollar, while weak durable goods orders can be blamed on the weather.

Joseph Trevisani: US yields have had a spectacular run...profit-taking was probably in order. It can, but it matches the Retail Sales reversal...

Yohay Elam: Right.

Joseph Trevisani: It seems that the entire $600 stipend that arrived in January was rushed out the household door, but the underlying family finances that pay for larger and more expensive durable goods, didn't change.

Yohay Elam: That's a good explanation, those checks.

Joseph Trevisani: Nonfarm Payrolls are forecast at 500,000 in March, which would bring the quarter to over one million.

Yohay Elam: I also think that a counter-trend in bonds was overdue.

Joseph Trevisani: Yes, I can't remember what we did with ours.

Yohay Elam: Kept your favorite restaurant in business?

Joseph Trevisani: The Biden administration is talking about another $3 trillion in the stimulus. In this case, more is not necessarily better. Yes, purely short-term consumption. So the January logic fits.

Yohay Elam: US infrastructure needs fresh spending checks are a sugar rush infrastructure is for the longer term.

Joseph Trevisani: True, but infrastructure takes time ad planning as the Obama administration discovered. It cannot, or at least should not provide an immediate economic rush. There is also the tax hike planned by the administration that may dent any recovery.

Yohay Elam: I think it depends on what tax hikes are announced. If they only reverse the Trump tax cuts, reversing that 2018 sugar-rush, the hit to the recovery will likely be minimal. I think the tax talk is pushing yields down. Taxman is breaking the dollar/yield correlation.

Joseph Trevisani: The euro dipped below 1.1800 for the first time since November, but its weakness has a lot to do with the European pandemic situation.  Merkel rescinded her proposed hard lockdown, but the plan must have been dispiriting for Geermany.

Yohay Elam: The mood here in Europe is depressed frustration is huge, anger at politicians on all levels, at pharma firms, the UK, everybody.

Joseph Trevisani: I think you are right on the tax talk.  Like the Keystone pipeline, it is hardly the time to eliminate jobs or raise taxes. Here in the US the government and Pharma firms performed very well. In the UK alos, so it is variable. Vaccines are widely available here, and many states have opened eligibility to younger folks,  Ha well younger than I am anyway.

Yohay Elam: The US, the UK, and Israel approached the virus and vaccines like a war, and rightfully so – all hands on deck and throwing money at the problem. The EU approached it as if were procuring a bridge. At 43, I'll be only eligible to sign up for a vaccine in a few months here in Barcelona. At least I feel young...

Joseph Trevisani: It is interesting that the USD/CAD is resisting the blandishments of the pro-USD crowd. The Canadian dollar is supporting the economic recovery outlook with its resource-based economy. Haha, I will refrain from comment.

Yohay Elam: Oil is critical for CAD.

Joseph Trevisani: Yes, Merkel gave the vaccine negotiating brief to the EU, rather than keeping it in Germany for Germans. My guess is the idea of the EU has taken a huger popular hit from its failure. The UK is in glaring contrast and Brexit has been given a great boost.

Yohay Elam: I think that vaccine management should have been centralized in Europe like in the US. The problem is with the execution. The US and the UK went all-in.

Joseph Trevisani: Yes Oil and CAD are tightly correlated.

Yohay Elam: All-in doesn't exist in the EU's dictionary. Brexit has caused non-tariff barriers and British exporters to the EU are frustrated. But the world is rightfully focused on the virus, and there the UK is a huge success and the EU is a total disaster.

Joseph Trevisani: It is difficult to execute all-in across 27 countries with 27 national governments

Yohay Elam: So indeed, boosting Brexiteerrs. It is difficult, but not impossible. The EU needs serious reforms. That should have been its moment. But organizations are tested in crises, and the EU failed the test.

Joseph Trevisani: Yes, you are right on the tariffs, but as you say, the emotional psychology is very much in favor of the UK government and Brexit. I have my doubts that the EU can perform the national role. But that has been my opinion for a long time. Organizations need the loyalty of their citizens, habitually or earned.

Yohay Elam: Indeed, trust is critical. Pandemic fatigue and frustration with governments can lead to worse virus outcomes.

Joseph Trevisani: The euro has bounced from 1.1800, and the 10-year is below 1.6%.

Yohay Elam: Well, maybe the dollar/yield correlation is making a comeback. But I think the tax talk broke it. More taxes mean less debt issuance.

Joseph Trevisani: Powell mentioned withdrawing stimulus as the economy improves in an interview this morning, and that has equities on the run.

Yohay Elam: Hmmmm. Powell is ever-powerful. But I think he already said something similar did he sound like withdrawing stimulus is imminent?. We'll hear from Biden about his economic plans on Wednesday. If he goes big – huge spending with tax hikes, it's a win for the dollar – amid a boost to the economy – but not for yields, as the government would have more funds.

Joseph Trevisani: Yes, I dont think the Powell comments are anything new. At this point, it is a truism to say when the economy recovers we will stop our extraordinary measures, but markets like excuses to trade. All-Powerful was one of the titles the Wizard of Oz used to describe himself.

Yohay Elam: The Fed, in general, is the Wizard of Oz.

Joseph Trevisani: I don't think Powell has, in all his many comments, sounded like the withdrawal of stimulus is imminent. Yes, but I hesitate to continue the metaphor.

Yohay Elam: Haha. I think they want to keep markets happy. But they will not mind a 15% correction in the S&P

Joseph Trevisani: Still, recovery is certainly in the market. Yes, it will be interesting to see if the actual recovery, brings on a bout of buying the rumor, sell the fact.

Yohay Elam: I think we're seeing a bit of that now. Perhaps the next upside stock moves are in Europe. Maybe the US tide will lift the leaky European boat once Europe gets its vaccines in order of course.

Joseph Trevisani: Europe will eventually get its pandemic house in order and the economy will recover. I am ready to return as a tourist to Venice and Italy, and my girls want to go to England, Scotland and Hogwarts. I am certain that will happen. It's the Ever Closer Union, that will need an emergency repair.

Yohay Elam: Indeed, I agree. In some places like Venice and Barcelona, perhaps Hogwarts as well, tourism was often too much. That also needs repair. Hopefully, it is another positive side effect of the pandemic, alongside the Work From Home boom

Joseph Trevisani: Yes, that is true. I am concerned about my hometown, Manhattan also.

Yohay Elam: Manhattan will be back to full business in the summer, perhaps apart from the usual influx of foreign tourism. NYC has recovered from so many shocks, it shall overcome again. Storms, 9/11, crime, and drugs.

Joseph Trevisani: I hope so but homework is an evolution of a different order.

Yohay Elam: Indeed, I think house prices are rising almost everywhere in America, with the exceptions being NYC and San Francisco.

Joseph Trevisani: Probably Chicago also, and that has much to do with the quality of life in those places.

Yohay Elam: Indeed. Looking forward. Will the dollar continue higher? We have payrolls and Biden's speech stand out. NFP on Good Friday should be messy for markets.

Joseph Trevisani: Biden has a scheduled news conference today, supposedly unscripted.

Yohay Elam: He'll probably unintentionally reveal something about the infrastructure spending program.

Joseph Trevisani: If not the nuclear codes.

Yohay Elam: Haha.

Joseph Trevisani: No, I jest. Markets and the dollar have baked in a strong US recovery, and have been pretending it is assured. While some degree of recovery is certain, how powerful is very much in the air.  It will be affected by US economic policy, taxes, and still, the pandemic.

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news Join Telegram

Recommended Content

Recommended Content

Editors’ Picks

AUD/USD: Bulls eye a daily 38.2% Fibo correction

AUD/USD: Bulls eye a daily 38.2% Fibo correction

AUD/USD is on the verge of a test of key weekly support. The Australian dollar hit fresh multi-year lows at the start of the week as investors moved into the safe-haven greenback after Britain's historic tax cuts plan added to market volatility. 


EUR/USD: Prospects of a significant correction from key monthly structure

EUR/USD: Prospects of a significant correction from key monthly structure

EUR/USD bears move in on a critical area of support. The US dollar strengthened on Monday on a volatile day to start the week which had EUR/USD slipping to 0.9552 from 0.9694. The single currency has dropped to a major level on the monthly chart.


Gold rebounds from 29-month low above $1,600, falling wedge, US data eyed

Gold rebounds from 29-month low above $1,600, falling wedge, US data eyed

Gold price licks its wounds around a 2.5-year low, mildly bid near $1,627 during Tuesday’s Asian session, as the market’s risk-off mood ebbs amid a lack of major data/events. US CB Consumer Confidence, Durable Goods Orders eyed to extend corrective bounce.

Gold News

Why the Solana price could wipe out all returns since August

Why the Solana price could wipe out all returns since August

Solana shows a significant uptick in volume amidst the recent decline. The largest candle within the current downtrend and consolidation belongs to the bears. Invalidation of the bearish thesis could occur if the bulls breach the $38.86 price level.

Read more

The sterling crisis: the BOE is set to step in, but what will it say?

The sterling crisis: the BOE is set to step in, but what will it say?

The pound remains in crisis, it had another surge lower to $1.0350 overnight, although it has recouped all losses at the time of writing, caused by expectations that the Bank of England will release a statement or hold an emergency rate hiking meeting soon.

Read more