- EUR / USD has fallen from the levels touched in the Asian session around 1.2100 to around 1.2050.
- Market commentators attribute the euro’s poor performance to the divergence between the Fed and the ECB.
- Data from the euro zone and the US avoided inflationary signals, but the currency markets largely ignored them.
It hasn’t been a great day for the euro, which has weakened against most of its major G10 currency counterparts aside from the yen and the Swiss franc. Against the euro, it is down around 0.1% or around 15 pips, having retraced from the levels touched in the Asian session around the 1.2100 level, with resistance in the form of the 21-day moving average at 1.20956 not helping. At present and during the last hours, the EUR/USD it has traded near 1.2050, finding support when it fell to 1.2030, but struggling as it approached 1.2070.
Performance of the day
Market commentators have attributed the weakness of the euro against the US dollar to divergent views of Fed and ECB members on recent bond market movements; Fed officials continue to show no concern about the recent spike in bond yields, with FOMC member Thomas Barkin going so far as to say that the Fed would be disappointed not to see yields rise when the economic outlook improves. Such comments stand in stark contrast to comments from ECB members who, at the very least, have indicated that the bank is “closely monitoring” long-term bond yields (President Christine Lagarde and several other officials said last week) . Other members of the ECB have gone further, and one of them openly called for an acceleration in the pace of weekly asset purchases to reduce yields, a sentiment with which the member of the Governing Council of the ECB, Francois Villeroy de Galhau, He seemed sympathetic when giving his comments on Monday; De Galhau essentially said that to the extent that rising bond yields constitute an “unwarranted” tightening of financial conditions, the ECB should “act” to counter this.
Markets have largely ignored data from the euro zone and the US, but rising inflation in Germany (and throughout the euro zone) poses a problem for an ECB that remains determined to remain subdued. Headline consumer price inflation in Germany increased at a 0.7% month-on-month rate (versus the 0.5% forecast) and at a 1.3% year-on-year rate (versus the 1.2% forecast). The HICP (the relevant measure for the ECB) was also firmer than expected, with a year-on-year rate of 1.6%. ING attributes the further acceleration in German inflation to rising energy prices, although it warns that “these figures are still distorted by lockdowns and imputed prices, as many goods and services are simply not available.”
According to ING, “there will be a series of specific factors that will push headline inflation up.” In the short term, the bank believes that energy prices will mainly increase inflation, but in the longer term, when economies reopen, “the price margins in the sectors most affected by the lockdowns will also add to the pressure. bullish on inflation. ” . Furthermore, “the full apogee of the German VAT reversal will only take place in the second half of the year.” As such, ING forecasts that German headline inflation will rise between 3% and 4% and that eurozone inflation could surpass the 2% level this year. Still, the bank (and most other analysts) expect the ECB to turn a blind eye to what they will likely call a temporary rebound in inflation.