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  • EUR/USD is heading lower, having dropped from the 1.1760s to fresh lows for 2021 in the low 1.1700s.
  • Higher US government bond yields and a defensive tone to risk appetite are helping support USD.
  • Strong Eurozone survey and inflation data has been shrugged off, as has a strong US Consumer confidence report.

EUR/USD continues to head lower, having now dropped from Asia Pacific levels in the 1.1760s to fresh lows for 2021 in the low 1.1700s. That amounts to a drop of about 0.3% or close to 40 pips on the day. Technically speaking, there is little by way of key areas of support until the 1.1600 handle (the November 2020 low), meaning a steady grind lower over the coming weeks is a strong likelihood.

Driving the day

A rise in US government bond yields, particularly in real yields (10-yer TIPS yields are up nearly 10bps on the day to close to -0.60%), is the main factor driving EUR/USD lower on Tuesday; USD is the best-performing currency in the G10 on the day, but is having the most success versus its lowest yielding peers, the euro, the Swiss franc and the yen (note; all of these are countries where the central bank has negative interest rates). Markets are also in a slightly defensive mood (US stocks and crude oil markets are lower anyway), which seems to be feeding some safe-haven demand into the dollar.

Data Recap

Its been a busy day of data on both sides of the Atlantic. Starting in Europe, where data was released earlier on in the session; survey data out of France and from the European Commission for the month of March was broadly better than expected, with French Consumer Confidence coming in at 94 (expected was 91) and the Eurozone Business and Consumer Survey’s headline index coming in at 101 (expected was 96.0). Though the data was a little more upbeat than expected, confidence in the Eurozone is set to take a turn for the worse in April, with most countries having toughed lockdown restrictions by a significant margin in recent weeks, hence the data did not provide EUR with any encouragement.

Preliminary Consumer Price Inflation reports for the month of March out of Spain and Germany were also in the spotlight, with both showing a sharp uptick in the YoY rate of inflation this month; the YoY rate of HICP inflation in Spain jumped to 1.2% from -0.1% in February, whilst the YoY rate of HICP inflation in Germany jumped to 2.0% from 1.6% last month. As was the case with the strong survey data, the jump in inflation did not prompt any reaction in the euro, with market participants expecting higher inflation in the months ahead given 1) weak base effects (inflation tanked this time last year due to the first lockdown), 2) the unwinding of the German VAT cut and 3) the recent jump in oil prices.

Looking stateside, Case-Shiller house price data was very strong; US house prices are up 12.0% on the year, boosted amid the low-interest-rate environment. High levels of house price inflation are not a concern for Fed policymakers who are intent in their insistence that the US needs more inflation, not less. Thus, FX markets did not pay hardly any attention to the US housing data.

Another interesting data point out of the US on Tuesday was the recently released Conference Board Consumer Confidence survey for the month of March; the headline index jumped to 109.7 in March, meaning that consumer confidence has now recovered about half of the losses incurred as a result of the pandemic (prior to the pandemic, headline consumer confidence was consistently in the 120s-130s, but in the months after the pandemic it ranged between the 80s-100s). That was the largest jump in Consumer Confidence since the aftermath of the 08/09 financial crisis and reinforces the narrative that the US economy is on the path to recovery as the vaccine rollout continues and the economy returns to normal – this narrative is likely to continue to support USD. The recent rise in Covid-19 cases ought to serve as a red flag that the US is not out of the woods just yet, however.