Indices of activity in manufacturing and services sector in the EU indicated a welcomed expansion in March. However, it came with a decent delay due to lockdown extensions. Compared to the pace of recovery in the US, it’s still just a minor uptick. Nevertheless, it was enough for Euro to break a series of falls as there was a bunch of risks associated with extended lockdown which were priced in the European currency. The March data eased concerns about worst-case scenario for the EU and helped to downplay impact of slow vaccinations and lockdown pressure on business sentiment. EURUSD is developing a rather rapid upward movement, while USD index broke the main uptrend channel which casts doubts on immediate continuation of the advance:
Improving demand for Treasuries also played against the US currency. The yield on 10-year notes continues to decline after reaching a local peak of 1.774% on March 30. In my view it’s just another break in the broad downtrend. Labor market data, ISM indices, in particular the components of new orders and expectations, consumer mobility indices call to prepare for new surprises in April, so the positive impact of the flight from long-date Treasuries on the dollar should still remind of itself in the near future.
The recovery in the Eurozone was quite synchronous: Markit pointed to the growth of business activity in Germany, Italy, Spain and Ireland, both in services and in manufacturing. Together, these four countries account for three quarters of the Eurozone's economy. Firms see a surge in orders in the United States against the backdrop of the lifting of restrictions, so they are too very optimistic about the near future.
Today, clues about the further behavior of the dollar should be looked for in the minutes of the Fed meeting for March. Expectations are modest – reiteration of the mantra of ultra-easy monetary policy despite all the optimism taking place in the data. Still, there are fears that the dynamics of inflation will cause discomfort among officials. Therefore, if there is even a slight bias towards hawkish policy, even a hint of an earlier curtailment of QE, it will certainly resume the growth of Treasury yields and support the dollar. In general, it is too early to write off strong dollar.
On the other hand, the risks of weak vaccination rate in the European currency may be eliminated by news refuting the connection of the Astra Zeneca vaccine with blood clots. This will signal a recovery in vaccination rates - a key component of expectations that immunization targets will be met earlier and mobility will recover faster.
From a technical point of view, the upward correction in EURUSD may hit the 1.1930 - 1.1960 zone before we could start discuss resumption of USD rally:
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