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The EUR/USD extended its rebound during the week, finding resistance below the 1.20 zone. Analysts at MUFG Bank, see less pessimism around the euro as the pace of vaccinations picks up, and speculation builds over the potential slower pace of purchases from the European Central Bank (ECB) beyond the second quarter.  

Key Quotes:

“The EUR has started off on a stronger footing in Q2 with EUR/USD rising back towards the 1.2000-level after hitting an intra-day low of 1.1704 at the end of last month. Similarly, EUR/GBP has rebounded back above the 0.8700-level up from the intra-day low of 0.8472 earlier this month. It represents a marked turnaround in the performance for the EUR following heavy losses in Q1 when it declined by -4.1% against the USD and -5.0% against the GBP.”

“The recent reversal in EUR price action has been supported by favourable moves in yield differentials.”

“Market participants are already beginning to anticipate that the ECB will begin to scale back purchases in Q3. However, we do not expect the ECB to provide a clear signal as soon as next week on the pace of QE purchases beyond Q2. The recent pick-up in the pace of vaccinations in major euro-zone counties is helping to ease the pessimism towards the euro that built up in Q1, and will also ease some pressure on the ECB to maintain faster QE purchases for longer. The pick-up in the pace of vaccinations has been most evident in Germany and Spain which saw the total number of people who have received one dose increase by 56% and 63% respectively in the first half of this month.”

“The developments are creating a more favourable backdrop for EUR performance in the near-term. A break back above 1.2000 would reinforce upward momentum.”