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Last month’s strong gains for the US dollar have almost been fully reversed as the US dollar’s correction lower has continued to extend at the start of this week after key technical levels have been broken. EUR/USD has climbed back above 1.2000 while the European Central Bank commitment to higher bond purchases in Q2 stays in focus.

ECB PEPP purchases have picked up but not “significantly”?

“The euro has derived support at the start of this week from rising yields in Europe. The 10-year yield spread between German and US government bonds has narrowed by around 24bps so far this month in favour of the euro partially reversing the 45bps of widening that took place between February and March. The pullback in US yields has been the main driver of the yield spread narrowing this month, although the recent uptick in European yields is attracting some market attention as well. It could reflect in part an easing of pessimism over the European growth outlook in response to the sharp acceleration in the pace of vaccine roll-out.”  

“It is already the consensus view that the ECB will slow the pace of planned QE purchases from Q3 as the outlook for the eurozone economy continues to improve. On top of that the latest weekly data released yesterday has cast some further doubt on whether the ECB will carry out significantly higher purchases in Q2. Over the last five weeks since the ECB’s last policy meeting, net weekly purchases have increased only modestly to a five-week average of EUR16.8 B up from EUR14.5 B in early March. The ECB may need to increase the pace of purchases further if upward pressure builds on yields. The risk of miscommunication for the ECB is adding to concerns over a ‘mini-taper’ tantrum.”