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  • Markets seem to already be entering holiday mode, with movement in the major FX pairings coming to a near standstill.
  • EUR/USD is currently consolidating close to 1.1770, just below 1.1780 session highs.
  • USD weakness due to lower US government bond yields has been the main driver of the pair on Thursday.

Markets seem to already be entering holiday mode, with movement in the major FX pairings coming to a near standstill. Note that it is Good Friday tomorrow, meaning most countries of Christian heritage (including the US, Canada, most of Europe, Australia and New Zealand) have a public holiday, meaning market closures. There will be some Asia flow coming in over the next few hours as market participants based in China, Japan and South Korea etc. enter the fray, but volumes are likely to be lighter than usual.

EUR/USD is currently consolidating close to 1.1770, just below 1.1780 session highs. It seems as though the end of the week (for most market participants, anyway!) has come too soon and capped the pair’s recovery just as it started to look promising; EUR/USD is set to close in the green for a second consecutive day, the first time it has been able to strig consecutive days in the green together since the first half of March. At present, the pair trades with gains of about 40 pips or just over 0.3%.

Driving the day

US government bond yields have been dropping throughout the session on Thursday. 10-year yields are currently down close to 7bps to just under 1.68%, while 30-year yields have tanked more than 8bps to under 2.35%. Real yields are also lower, with the 10-year TIPS just over 4bps lower on the session to under -0.67%. No specific fundamental catalyst or piece of news can be pointed at as explaining the move. Rather, it seems that after a torrid Q1 during which time US government bonds were hammered, market participants are taking the opportunity at the start of the new quarter to adjust their positioning a little – on Thursday, this appears to have come in the form of position squaring/profit-taking on shorts.

Whatever the reason for the drop in US government bond yields, it is helping risk appetite (stocks and most commodities are higher) and hurting the US dollar, as US/G10 rate differentials are eroded. This is the main reason as to why EUR/USD has been able to make up ground on the day. Indeed, the strength in the pair appears to have little to do with the euro, though some market commentators have pointed to final Eurozone Markit Manufacturing PMI data released during the early European session as a positive catalyst (the surveys were a little better than expected). In other Eurozone, related news, ECB officials have been sounding dovish but this expected and has not seemed to hurt the euro; Chief Economist Lane noting near-term uncertainties and downplaying inflation risks and ECB’s Weidmann noting risks to the bank’s 2021 growth forecasts amid recent tightening of lockdown restrictions.

In terms of what lays ahead for the pair; despite US market closures, the Bureau of Labour Statistics is still going to release the latest US jobs data on Friday. The reaction in the few international markets that are still open is likely to be very volatile amid thin volumes. The main driver of the pair is likely to remain on the USD side of the equation in the coming weeks, with the main question being whether US government bond yields can resume their steady ascent and whether this can continue to support the buck, no doubt at the expense of the likes of the euro.