- EUR/USD has reversed sharply from earlier 1.1950 highs and is back under 1.1900 again.
- Technical selling on the break of support at 1.1910 seems to have contributed to accelerated selling.
- Looking ahead, Wednesday’s FOMC meeting is the key event to keep in mind.
EUR/USD has been on the back foot over the last few hours and has slipped below the 1.1900 level for the first time since last Wednesday. That marks a sharp reversal from earlier session highs in the 1.1950s, with selling seemingly exacerbated by a break of support in the 1.1910 area that had been in play since the start of the week. The pair currently trades lower by about 0.2% or nearly 30 pips and the euro is now one of the worst-performing currencies in the G10 on the day, having at one point earlier in the European morning been one of the better performers.
Driving the day
Early euro outperformance was aided by a stronger than expected German ZEW survey for March. To summarise; German ZEW Economics Sentiment rose to 76.6 in March from 71.2 in February, a larger jump than the expected rise to 74.0. Similarly, Current Conditions saw a larger than expected jump, rising to -61 from -67.2, though this is still well below pre-pandemic levels, which is unsurprising given Germany has been stuck in varying degrees of lockdown so far this year. ZEW commented that while the second lockdown has paused the recovery, their data does not suggest there will be as drastic a drop in GDP in Q1 2021 as was experienced in the Q2 2020 lockdown.
The gains were short-lived and by the start of the US session, EUR/USD was testing the 1.1900 level and has since broken below it. The drop from earlier highs comes despite soft US data; US Retail Sales dropped more than expected in February, but that mostly represents the fading boost of January’s stimulus cheques. Retail sales will undoubtedly jump again in March after the government hands out another $1400 to each US citizen. More concerning was the larger than expected drop in Industrial Production in February; analysts note that poor weather conditions last month contributed to the drop, but note also that global supply shortages also played a factor and this could be a longer-lasting drag.
Perhaps traders/market participants have been more focused on negative news flow coming out of Europe regarding various EU nations taking unilateral action to halt the rollout of the AstraZeneca vaccine amid concerns it might be linked to blood clots, despite the central EU Health Authority (the European Medicines Agency or EMA) recommending the rollout continues. According to the EMA, the WHO and UK health authorities, there is no link between the vaccine and blood clots and it seems as though further vaccine rollout delays will cost more lives in the Eurozone, as well as further delaying the bloc’s economic reopening and subsequent economic recovery.
In terms of other news of note; ECB Executive Board Member Frank Elderson was answering questions on Twitter and said that inflation is likely to continue to rise in the coming months, though the ECB sees this as mainly due to transitory factors which they will “look through”. Separately, the FT reported that the EU is looking to propose “digital green certificates” to allow EU citizens to start travelling again inside the bloc; EU citizens will get a green certificate if they are vaccinated, can prove they have recently recovered from Covid-19, or have recently been tested and received a negative result.
Ahead of tomorrow’s FOMC meeting, which is the main event of the week as far as EUR/USD is concerned, trade is likely to become more consolidative.
Meanwhile, Wednesday sees the FOMC release the result of their latest monetary policy decision; the bank is expected to hold interest rates at their zero-lower band (0.0-0.25%) and the rate of asset purchases steady at $120B per month (of which $80B are US government bonds).
The Fed statement and Fed Chair Jerome Powell’s remarks in the press conference are likely to stick to the usual dovish tone; i.e. no rate hikes until the bank has met its updated dual mandate (i.e. full employment and inflation that is moderately and sustainably above 2.0%), something which the Fed is likely to reiterate is still a long way off, and no tapering of asset purchases until substantial further progress has been made towards its dual mandate (something which Powell is also likely to say is a long way off).
The Fed will be releasing new economic projections which will be more closely scrutinised than usual; officials have been talking about how they expect inflation to pick up in the short-run and the updated inflation forecasts will formalise such expectations. The updated dot-plot is also of note; markets have brought forward their expectations of the first Fed hike as soon as late-2022/early-2023, despite the Fed’s old dot plot not forecasting any hikes through to 2024. Maybe the new dot plot might foresee a hike in 2023 (if not, that would be dovish).
Meanwhile, traders will also be on the lookout for any more information of if, when, and how the Fed might respond to further increases in US government bond yields, as well as any hints as to the conditions the Fed might want to see before tapering asset purchases – more information on the former is more likely than on the latter, as the Fed will likely want to avoid causing yields to move higher.
A few technical factors are also worth considering; bank SLF relief (which means they do not have to hold capital reserves for their treasury holdings) is set to expire this month and the Fed needs to decide whether to extend this. If not, this could cause some market problems as banks rush to meet their new, higher capital requirements. Some desks also think the bank might tweak the Interest of Excess Reserves Rate (IOER), which is a tool the bank uses to keep the Federal Funds rate within its target band – if they do, they will insist that this does not constitute a tweak to monetary policy, rather just a technical adjustment to maintain policy.