EUR/USD is currently trading close to highs of the day around the 1.1900 level, the pair having managed to aggressively reclaim the big figure and jump back to the north of its 200-day moving average at 1.1883 in recent trade. With the pair having now convincingly reclaimed 1.1900, medium-term bulls will be on the lookout for a gradual move back towards the 50DMA at 1.1974 and the mid-March double top at 1.1990 just above it. On the day, EUR/USD trades with gains of just under 60 pips or about 0.5%.
The euro has been a beneficiary of broad USD weakness on Thursday and sits somewhere near the middle of the G10 performance table for the day. That implies that the main driver of EUR/USD has been the dollar side of the equation, not the euro side. Indeed, there has not been a great deal to update on with regards to the Eurozone, aside from ECB speak and the release of the minutes of the March ECB meeting; regarding the latter, as expected, the tone of the minutes was very dovish, with ECB members agreeing that it is important to provide assurance that the governing council will be maintaining highly accommodative monetary policy conditions for as long as necessary and sees no risk of overheating. Turning to ECB speak, ECB President Christine Lagarde noted that the pandemic and related containment measures will continue to have a negative impact on economic activity in the Eurozone in the short-term, but that activity should pick up later in the year. ECB Chief Economist Philip Lane reiterated that favourable financial conditions must be maintained, ECB’s Klass Knot noted that he hopes the pace of asset purchases under the PEPP can be reduced by June.
Turning to the US dollar then and the reasons for its weakness. The latest bout of selling has come in wake of remarks from Fed Chair Jerome Powell; Powell, speaking at an IMF panel over the last hour or so, said that the outlook for the US economy has brightened as a result of fiscal support and vaccines. However, Powell noted that the slower pace of global vaccinations and the recent rise in Covid-19 infections in the US are both risks to the recent progress that has been made, and that he expects a rise in Covid-19 cases to slow the economic recovery. Powell noted that while fiscal and monetary support have helped the US economy avoid a lot of scarring, the economy continues to need support, before adding that millions of people will have a hard time getting back into the workforce. In reference to the recent strong jobs report, Powell said the Fed would want to see a string of months like the March jobs report to see progress towards its goals, before pointing out that the unemployment rate in the bottom quartile of the economy is still 20%.
In sum then, Powell’s remarks on the economy were dovish, hence the weakness in USD; he acknowledged but seemed to play down recent strong data and the recent improvement in the economy’s economic outlook, while coming across as eager to emphasise that the economy remains a long way from the Fed’s goals (as expected). Moving on to Powell’s remarks on inflation; he noted that a one-time increase in inflation is different from a persistent increase in inflation, which he defined as inflation going up “year after year after year”. In that vein, Powell reiterated that the upwards price pressures later this year are most likely to be temporary, in other words, saying that the Fed is not going to be worried by the pickup in inflation and will stick to its guns with regards to easy monetary conditions. These comments, whilst nothing new, also seem to have contributed to the dovish tone of Powell’s remarks.
But USD had been on the back foot even before Powell’s remarks. Lower US government bond yields (the 10-year has dropped to under 1.64%) and a generally risk-on market tone (the S&P 500 is currently trading just under all-time highs in the 4090s) have been weighing on the buck. Traders have also cited the release of Wednesday’s minutes of the 16-17 March FOMC meeting, which seemed to be on balance dovish. The minutes did not seem to have much of a market impact at the time; they were as dovish as you would expect. However, as time has gone on and markets have had more time to digest the contents, markets seem to be interpreting them as more dovish. Indeed, the minutes emphasised how a number of FOMC participants want the Fed to see actual progress towards their goals before tightening, rather than tightening based on forecasts. In other words, the Fed is keen to put itself “behind the curve”, given that it is of the belief that being “in front of the curve” hurt economic growth by allowing financing conditions to tighten too quickly in the past.
Looking ahead, the main event for US dollar traders to keep an eye on for the rest of the week is Friday’s Producer Price Inflation report for the month of March. Euro traders, meanwhile, will be eyeing remarks from ECB Vice President Luis de Guindos at 08:30BST on Friday. Otherwise, EUR/USD is likely to continue trading as a function of bond yield differentials and the state of the pandemic on both sides of the Atlantic.