EUR/USD: Three Reasons Why The Euro Is Set To Extend Its Falls

Time to give back weekly gains? EUR/USD has been retreating from the highs and may have substantially more room to give up previous gains as the week draws to a close.

There are three fundamental downside drivers:

1) US yields have ended their correction

Returns on US debt remain the main market driver – and when they rise, the dollar moves higher as well. The rise in ten-year yields above 1.60% is critical.

The latest trigger came from President Joe Biden’s national address just after signing the $1.9 trillion coronavirus package into law and unleashing stimulus checks to Americans. The most significant headline was that he aims that all Americans will be eligible for vaccines in early May – beating the schedule once again.

The mix of stimulus funds and a quicker reopening joined a minor upside surprise in jobless claims and made safer Treasuries less attractive to investors. The University of Michigan’s preliminary Consumer Sentiment Index for March is set to edge up as well. The greenback remains well bid.

2) ECB – is that it?

While the Federal Reserve sees higher yields as a healthy sign of growth, higher returns on European debt only serve as headwinds for the fragile recovery. The European Central Bank sought to address this by accelerating its bond-buying program “significantly” in the second quarter.

However, the scope of the plan remains unchanged at €1.85 trillion. Moreover, this Pandemic Emergency Purchasing Program (PEPP) is still on course to expire in March 2022. Accompanied by confusing messages from ECB President Christine Lagarde, the euro remains vulnerable.

3) Vaccine issues

Europe’s sluggish growth forecasts are highly correlated with its slow vaccine rollout – and the situation has further worsened. While regulators approved Johnson & Johnson’s single-shot inoculations, only small deliveries are due.

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