EUR/USD Set To Extend Falls After The Breakdown, US Stimulus Becomes Dollar Booster

Taking full responsibility – European Commission President Ursula von der Leyen has reportedly acknowledged her mistakes in the bloc’s vaccine debacle. That is unlikely to help the euro. The old continent’s lag in immunizing its population has been raising fears of a double-dip recession and is weighing on the common currency.

Britain’s inoculation campaign has already reached 14% of the population – and its vaccination strategy seems to have been vindicated. Spacing AstraZeneca’s shots have proved more efficient in preventing COVID-19 than injections only a month apart. The EU has a substantial amount of AZ’s doses in the pipeline, so that is good news also for the continent – but deliveries are still delayed. Malta, the bloc’s leading country in the field, has only reached 4.9% of its population.

EUR/USD had been supported by the upbeat market mood, partially driven by hopes for US stimulus. The safe-haven dollar dropped on hopes that the US would recover faster and that it would pull the entire world forward. However, President Joe Biden’s relief package may turn into a greenback booster.

Democrats have advanced the full package in the Senate using a partisan reconciliation process – raising the chances for approving $1.9 trillion of new funds as Biden originally suggested. That is far above a package of roughly $600 billion that a group of ten Republicans suggested. Investors are upgrading their outlooks in response to prospects of additional spending, buying stocks and selling bonds – and the resulting increase in Treasury yields makes the dollar more attractive.

Is it a lose-lose situation for EUR/USD? Not so fast. First, nothing in Washington is decided until the last moment, and moderate Democratic Senator Joe Manchin may still oppose parts of the relief package such as a substantial increase to the minimum wage.

Secondly, the positive development around AstraZeneca’s vaccine mentioned above may still weigh on the dollar. Moreover, there are growing signs that Israel’s immunization effort – the world’s most advanced – is bearing fruit. Among those over 60, who were prioritized, hospitalizations and rates of severe illness are falling.

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