EUR/USD probing last week’s 1.2170 highs as US slides

EUR/USD, having bounced firmly off of its 21-day moving average in the 1.2090s early during European trading hours, has continued to press to the upside and is currently testing last week’s high at just shy of the 1.2170 mark. EUR/USD has thus managed to cross confidently back to the north of its 50-day moving average which currently sits at 1.21535 and EUR/USD bulls will be looking to see if the pair can close to the north of this level for the first time this month.

A close above last week’s 1.2170 high and the 50DMA could potentially be a bullish sign that a greater push back towards 2021 highs set in early January might be coming up next. Other G10/USD major pairs such as AUD/USD, NZD/USD, GBP/USD and CAD/USD are all close to or sat at post-Covid-19 highs, so its seems as though the US dollar side of the EUR/USD equation isn’t the one holding the pair back from a more aggressive rally.

But with the Eurozone’s vaccine rollout lagging, meaning that its post-Covid-19 economic rebound is likely to be postponed (say in comparison to the US or UK’s), and the prospects for any meaningful pick up in long-term inflation much milder than in the US, EUR underperformance over these past few weeks is perhaps unsurprising and seems likely to continue. That does not mean that the rug might not be pulled from beneath the US dollar and for it to resume its long-term downtrend that had been in play for much of 2020. If that was to be the case, even though the euro wouldn’t be the prime G10 candidate to benefit from this, EUR/USD would likely head back towards cycle highs.

Driving the day

It is difficult to pinpoint exactly what has driven the softer USD on Monday, though some are pointing at early month-end selling. EUR might not be the best performer, but has managed to make up some decent ground versus the buck, aided by a stronger German IFO survey report for February and not hindered at all by dovish remarks from ECB President Christine Lagarde on bond yields.

Fed, ECB, yields

Moves in global bond markets are catching the eyes of central bankers. Bond investors have been selling in anticipation of a stronger post-Covid-19 recovery and in anticipation that the global economy (at least the US and Asia Pacific economies) will run hotter than expected next year, prompting central banks to tighten policy earlier than is currently in their guidance. How central bankers view recent bond market moves and how they view recent changes in market expectations regarding when central banks will be lifting rates from the zero lower bound is likely to be a key determinant of FX market price action this week (and in the coming weeks).

In that regard, though her comments did provoke a response in European government bond markets (particularly in long-end yields), ECB President Christine Lagarde’s comments that the ECB is closely monitoring the evolution of longer-term nominal bond yields did not lead to much reaction in the euro. The idea that Lagarde’s ECB would take a hands-on approach towards the management of bond yields is nothing new, with markets having observed Lagarde’s ECB actively use jawboning and its pandemic QE programme (the PEPP) to keep Italian bond yields in check and the Bund-BTP spread tight. Markets very much Eurozone interest rates to be staying low for a very long time.

Conversely, should similar comments come out of Fed Chair Jerome Powell or Vice Chair Richard Clarida’s mouths later this week, then the market reaction is likely to be much greater, given that the US economy is expected to outperform the Eurozone by a significant margin for the foreseeable future, putting the Fed in a position where it actually can raise rates (unlike the ECB). Note, Powell testifies before Congress on Tuesday at 15:00GMT (and then repeats the same remarks at 15:00GMT on Wednesday) and Clarida speaks at 21:00GMT on Wednesday.

US government bond yields, nominal and real, have rocketed higher since the start of last week; US 10-year yield is currently at 1.367%, up from around 1.20% at the start of last week and the 10-year TIPS yield is just above -0.8%, up from around -1.0% at the start of last week. Powell and Clarida might indicate a hands-off approach as influential FOMC member (and NY Fed President) John Williams did last Friday, when he indicated that rising yields are not a concern. This might be taken as a green light for further gains.

Should Powell and Clarida opt instead to take a similar tack to Lagarde and “jawbone”, then yields could drop sharply. Given the fact that rising yields have not had much of a positive impact on the USD in the last few days, perhaps this drop in yields won’t have a particularly negative impact, though that would remain to be seen and may depend on how much of a mood the market is in to sell dollars. With month-end approaches, a few high profile US banks are already forecasting USD selling; this could provoke the bearish USD mood music that the currency might need for a drop in real and nominal bond yields to take it back to fresh annual lows.