EUR/USD Forecast: Four Reasons For A Bounce At Critical Confluence Point

The frog has jumped out of the boiling water – markets were able to absorb gradually rising US bond yields, until Thursday’s leap in returns. Higher Treasury yields – the ten-year benchmark hit a high of 1.61% – and the risk-off mood have been favoring the safe-haven US dollar, sending EUR/USD down over 100 pips.

Will the sell-off in bonds continue and push the pair even lower? Not so fast. Here are four reasons for a bounce. 

Investors have been repricing growth prospects following the deployment of vaccines and stimulus. Immunization continues at full speed in the US and is set to pick up in Europe, especially as Johnson and Johnson’s single-shot vaccine is set for final FDA approval on Friday.

1) Stimulus snag: However, on the stimulus front, President Joe Biden’s proposed $1.9 trillion stimulus plan hit a snag. Elizabeth MacDonough, the Senate parliamentarian, disqualified the hike in the minimum wage from the bill. While House Speaker Nancy Pelosi is set to push the legislation forward, it is in a bind in the upper chamber. Prospects of a delay in further aid to the economy soothe concerns about the economy overheating.

2) No inflation (for now) Another factor that could contribute to calm in markets is the publication of the Core Personal Consumption Expenditure (Core PCE) figure – the Federal Reserve’s preferred gauge of inflation. It will likely show that price rises remain tame, a drop from 1.5% to 1.4% yearly.

3) Flows: The third factor that may play in favor of bonds – thus against higher yields and the dollar – is end-of-month flows. Money managers are set to adjust their portfolios in order to tidy up their reports, and that may balance the recent moves.

Jerome Powell, Chairman of the Federal Reserve, pledged to keep supporting the economy – leaving rates low and bond-buying high – in two public appearances. His colleagues, including hawk Esther George, repeated the same message and dismissed inflation. That worked on Tuesday and Wednesday but failed on Thursday.

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