- EUR/USD is consolidating close to the 1.1900 level as the week draws to a close.
- Eurozone news with regards to the pandemic has continually gotten worse throughout the week.
EUR/USD has managed to reclaim the 1.1900 level following a brief dip into the 1.1870s early on during US trading hours and looks to be stabilising in this area as the weekend fast approaches and volumes rapidly drop off. As things stand, the pair looks likely to close the session with very modest losses of about 0.1% or around 10 pips.
Driving the day
Aside from the news that the Fed would not be extending pandemic-era supplementary leverage ratio (SLR) rules beyond the end of the month, which spurred some short-lived USD strength, there were very little by way of fundamental drivers on Friday. For reference, these SLR rules had allowed banks to hold US treasuries and deposits on their balance sheets exempt from normal capital ratio requirements, a ruling the Fed decided upon in the early stages of the Covid-19 crisis order to stem excessive selling pressure in US treasury markets.
For the most part, Eurozone news this week has been bad; France announced four weeks of tougher lockdown restrictions in 16 regions (covering 40% of the country’s GDP) on Thursday and various desks have subsequently been downgrading their forecasts the French economic recovery in 2021 as a result. Meanwhile, the German Health Minister was on the wires this morning talking about how there isn’t enough vaccine supply to stop a third wave in Europe this summer. He predicted things could be as bad at Easter as it was over Christmas and revealed that AstraZeneca will be delivering less vaccines than expected in Q2.
Elsewhere, despite the EMA’s review concluding that the benefits of the AstraZeneca vaccine far outweigh the risks, many European nations are not rushing to restart their rollouts of the vaccine, costing the bloc precious time in the race for herd immunity. Italy may be an exception; the country has quickly restarted it AstraZeneca vaccine rollout and Italian PM Mario Draghi was on the wires recently talking about how he hopes the daily vaccination rate in the country to reach 500K by April and then to rise further in May and June.
Commentary from Fed members has also been of note on Friday; Fed Chair Jerome Powell released an article on the WSJ recounting the events of the last year (i.e. how the pandemic affected people, the US economy and the Fed’s response) but gave away very little by way of new information regarding the outlook for the economy or Fed policy.
Elsewhere, Richmond Fed President Thomas Barkin spoke on CNBC and seemed to largely stick to the Fed’s usual script. On the recent rise in bond yields, Barkin said it reflects economic optimism, higher inflation expectations and the positive impact of the strong vaccine rollout, before adding that the economy will be strong enough to take somewhat higher rates. On the economy, Barkin said he expects that we will have a very strong Summer and Autumn as pent-up demand comes back as the economy reopens (in line with Fed forecasts). On inflation, Barkin said that he expects to see price pressures this year (in line with Fed expectations), but maintained that long term disinflationary trends will continue to act as a headwind to inflation further in the future (Fed Chair Jerome Powell believes the same). On policy, Barkin reiterated that the Fed will taper its asset purchase programme when substantial further progress is made towards its mandate, and also expects that the Fed will start raising rates when the conditions to do so have been met (i.e. full employment and inflation sustainably and moderately above 2.0%).
There is set to be a bombardment of Fed speak next week, including from Fed Chair Jerome Powell who speaks on three separate occasions, as well as comments from Fed Vice Chairman Richard Clarida and NY Fed President John Williams. They will likely reiterate the points made by Barkin outlined above. Other key US risk events to keep an eye on include the timely preliminary Markit PMI report for the month of March (out on Wednesday) and February Core PCE inflation data (the Fed’s favoured gauge of inflation).
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