EUR/USD rangebound between 1.2120-40s, but supported by soft US dollar

EUR/USD has bounced back from session lows of just below the 1.2120 mark in recent trade, saved weakness in the US dollar, but has been unable to get back to last week’s highs around 1.2150 or indeed session highs set early in the European session in the 1.2140s. On the day, the pair trades with modest gains of about 20 pips or 0.15%.

EUR/USD is seemingly back trading in last Wednesday and Thursday’s 1.2120ish-1.2150ish range. It may take a more pronounced weakening of the US dollar (i.e. the Dollar Index dropping back towards 21 January lows of just above the 90.00 level) in order for the pair to break above 1.2150, given subdued appetite towards the euro at the moment. Above 1.2150, however, EUR/USD will find resistance in the form of the 50-day moving average at 1.2155.

USD under pressure

Safe havens assets (such as JPY, USD and US government bonds) are struggling on the first trading day of the week, despite the absence of Chinese and North American market participants, both of whom are celebrating respective public holidays (Presidents’ Day in America and still midway through Lunar New Year celebrations in China). Global equity and crude oil markets have been rallying given optimism regarding the state of the global pandemic (the UK hit the crucial milestone of vaccinating it’s 15M most vulnerable citizens and the US is seeing a continued drop in the infection rate whilst it ramps up its vaccination efforts).

Positive pandemic news comes against the already favourable backdrop of expectations for more US fiscal stimulus, ongoing global central bank support and a rapid global economic expansion to begin later in the year as populations in key developed markets hit herd immunity. Hence, US equity index futures have been pushing on to fresh all-time high levels on Monday and US bond yields are also rising (the 10-year is now above 1.21%), though, importantly for USD, real yields remain low (the 10-year TIPS sits at -1.02%). For rising nominal yields to be bullish for the US dollar, they will have to be accompanied by rising real yields (which would make the USD a more attractive investment relative to other currencies).

But the euro out of favour

Despite broad weakness in the US dollar versus the majority of its G10 counterparts (aside from JPY, which is being hit even worse), EUR/USD has failed to garner much by way of upside impetus. Part of that will be due to the lack of market volume at the moment given the absence of US and Chinese players in the market on Monday (due to public holidays). But that does not explain euro underperformance against the likes of GBP, CAD, AUD and NZD.

Euro underperformance versus risk-sensitive FX (like the Australian, Kiwi and Canadian dollars) makes sense given the market’s risk-on tone. Euro weakness versus pound sterling seems to have more to do with the EU’s comparatively sluggish vaccination efforts versus the UK; as noted, the UK hit its 15M vaccinations by mid-February target over the weekend. Nearly one-quarter of the citizens in the UK have now been vaccinated. That compares to just 5% in Germany, 4.9% in Italy, 4.4% in France and 5.3% in Spain. Meanwhile, the US has vaccinated 16% of its population and is not too far behind the UK.

As long as vaccinations do remain effective against the various Covid-19 variants spreading across the world at the moment, the US and UK are set to reopen their economies much sooner than the EU. For example, the UK is targeting getting the first jab in the arms of all of its adult populations by the end of May. By contrast the EU is expecting to have fully vaccinated only 70% of its adults by the end of September. The Eurozone’s sluggish vaccination performance may well weigh on the euro further.

Meanwhile, though infection rates have been dropping on the mainland, concerns linger regarding the spread of Covid-19 variants (such as that first found in the UK or South Africa); advisors to Italian Health Minister have reportedly been suggesting that the country should impose another nationwide lockdown amid concerns over the spread of new Covid-19 variants. Talk of tougher restrictions in the EU could highlight the bloc’s divergent fortunes when compared to the US and UK, where the momentum is towards easing restrictions.

In terms of Eurozone news flow on Monday, data this morning was mixed; the bloc’s trade surplus was a little larger than expected in December at EUR 29.2B versus forecasts for a reading of EUR 25.3B. However, Industrial Production data for the same month was a disappointment; the YoY rate of production growth came in at a sluggish -0.8% versus forecasts for -0.3% and the MoM rate of production growth showed a larger than expected monthly drop of 1.6% (versus forecasts for -1.0%).