EUR/USD: Trump Distraction Could Push Euro Even Higher (Temporarily)

Distraction can be a good thing – at least for the euro. Markets are awash with cash, and as funds have flown into bonds once again – without leaving stocks – the drop in US yields has been weighing on the dollar. In parallel, records highs in stocks – and also Bitcoin, another distraction – have been weighing on the safe-haven dollar. The change in narrative has propelled EUR/USD to 1.21.

Can this uptrend continue? One of the main market movers has been speculation about the size of the relief package that Democrats are able to pass. President Joe Biden is urging Congress to approve his original plan worth $1.9 trillion but is also willing to compromise – mostly with members of his party, rather than Republicans.

Moderates and liberals are at odds over eligibility for stimulus checks. Centrists prefer an income limit of $50,000 per year and the left-wing wants it to rise to $75,000. Investors seem disinterested in these details and simply want a quick and smooth approval in Congress, regardless of which side wins and what the GOP thinks.

The political focus is set to shift from stimulus to the start of former President Donald Trump’s impeachment trial for inciting the insurrection on Capitol Hill in early January. Trump’s future is of no interest to markets, but the distraction may delay stimulus in turn. In turn, investors may continue buying bonds in anticipation that the relief package would be delayed and eventually be smaller. A drop in yields would be adverse for the dollar.

For the euro, Trump’s trial is a welcome distraction from the old continent’s own woes, namely its frustratingly slow vaccination campaign. Europe’s meager immunization effort is already weighing on sentiment, as seen in the Ssentix Investor Confidence for February which dropped to -2 points, reflecting pessimism.

Will markets turn against the euro? The broader EUR/USD downtrend is intact, but Tuesday’s trading will likely see an extended upswing. Dollar weakness, stemming from postponing stimulus, may drive returns on US debt lower, carrying the dollar with it.

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