EUR/USD: Perfect Bearish Storm? Concerns About US Inflation, Europe’s COVID Situation Loom

At an inflection point – that is how Federal Reserve Chair Jerome Powell has described the economy, which is reopening rapidly and creating jobs amid America’s successful vaccination campaign – which provides the dollar advantage over the euro. Around 35% of Americans have received at least one shot, while the figure in Europe is below 20%.

The powerful central banker has also expressed worries that a rapid return to normal would allow the virus to spread and urged caution. While cases are rising in certain states, investors are more concerned about rising US inflation. Producer prices jumped in March by 1% monthly, double the expectations and beyond the expected “base effects.” Investors are repricing the chances that the Fed raises rates sooner than later.

Tension is now mounting toward Tuesday’s Consumer Price Index statistics. Economists expect annual inflation to rise in the coming months and uncertainty about its sustainability is what is driving the dollar.

In the old continent, the European Central Bank has the opposite problem. Fabio Panetta, an Italian member of the ECB, said that the bank “must accept no further delay in lifting inflation.” The Frankfurt-based institution has ramped up its euro-printing scheme but governments are moving slowly with deploying fiscal support already agreed upon.

IIn the meantime, Europe’s COVID situation remains worrying, albeit not worsening. Italy is mulling lifting some restrictions in May while infections in Germany are stabilizing.

Nevertheless, even if the old continent is making some headway against the virus and jabbing its population at a faster rate, vaccines may prove less effective than previously thought. A study in Israel has shown that Pfizer’s immunizations provide less protection against the South African variant of the virus. Such worries may boost the safe-haven dollar.

All in all, the dollar has room to gain ground and cause a “course-correction” after a bullish beginning to April.

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