Euro (EUR/USD) – Weakness on the Horizon
- Eurozone in a double-dip recession.
- The lagging EU vaccination program will weigh on EUR/USD in the weeks ahead.
- In this article DailyFX Strategist Nick Cawley puts the case for EUR/USD weakness.
- DailyFX analyst Martin Essex argued earlier today that EUR/USD will strengthen.
The covid-19 pandemic continues to hit the Euro-area hard with the latest Q1 GDP figures showing a double-dip recession with economies across the single-block hampered by a slow vaccine roll-out and ongoing lockdowns. Germany’s growth contracted by 1.7% in Q1, while Italy entered a technical recession with two-quarters of negative growth, -1.8% in Q4 and -0.4% in Q1 2021. While the Euro-area release was marginally better than expected, the difference with the United States is stark, where the latest Q1GDP data showed an annualized growth rate of 6.4%. The Euro-area may narrow this gap over the coming months, but until then US dollar strength will continue to push EUR/USD lower.
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The problems with the EU vaccination program have been well documented and it is good news that vaccinations are now taking place at a faster rate across the block. In the US, 44% of the population has had at least one vaccination shot, while the two best-placed EU members, Germany and France, have one-shot vaccination rates of 28% and 23% respectively. Over the next few months, it is expected the EU program will catch up with the US – and the UK – but the prior time lag will still leave the EU economy underperforming the US markedly. Strong US data releases over the last few weeks continue to confirm the strength of the US economy, aided by ultra-loose monetary policy, and it is likely that these liquidity measures will come under increasing scrutiny in the weeks and months ahead.
The closely followed University of Michigan consumer sentiment index recently hit a pre-pandemic high, while last week’s US conference board consumer confidence reading jumped to 121.7 compared to a reading of 109.0 in March and again is back at pre-February 2020 levels. On Friday (May 7) the latest US Labour report is expected to confirm the ongoing strength in the jobs market with expectations of nearly 1 million new jobs added in April, bringing down the unemployment rate to 5.8% from 6.0% in March.
Any additional strong US data releases, or official suggestions of a timetable to rein back liquidity measures, will force US Treasury yields higher, weighing on EUR/USD. While the yield differential between the US Treasury 10-year and the German 10-year Bund has narrowed from around -210 to -186 recently, the spread remains under pressure and may revisit the -250 lows seen in early-mid 2019. This will present a further EUR/USD headwind as investors seek the higher returns available on the US benchmark bond.
A look at recent EUR/USD price action suggests a sideways to mildly bearish outlook. The European Central Bank will look positively at a lower EUR/USD rate – helping the block’s exports and importing inflation – and a further drift lower cannot be discounted. To confirm further weakness the April 29 high needs to remain unbroken, leaving the recent lower highs in place, while the recent lower low at 1.1704 is unlikely to come under pressure in the near term.
EUR/USD Daily Price Chart (September 2020 – May 4, 2021)
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