The US dollar came under pressure at the end of the week. It lost over 1% against its main counterparts. Pressure started to increase amid an accelerated pace of purchases in the bond market and the unexpectedly strong news background. The Fed's dovish stance added fuel to the fire. As a result, the market saw a rally of the euro against the US dollar.
Bulls pushed the price to the psychologically important level of 1.200, ignoring statements about a difficult epidemiological situation made by the EU government. It seems that traders were buying the pair based on expectations of a bright economic future after the pandemic. In fact, data presented by Europe's locomotive, Germany, revealed that the economy has started to adapt to the conditions of the pandemic. Thus, bulls have all the reasons to buy the pair. The question is how strong these reasons are. It could have been a short-term impuls.
Today, traders' sentiment has changed slightly. Yields on Treasuries increased, boosting the US dollar. As a result, the euro plunged below 1.1900.
The EUR/USD may be brought under additional pressure in the near future.
On Friday, Isabel Schnabel, Member of the Executive Board of the ECB, warned against a failure to proceed with the European Union's Recovery Fund, saying such a step would be an "economic disaster for Europe." The EU can no longer ignore the issue relating to the allocation of financial aid to the economy amid an adopted large-scale stimulus plan in the United States. Joe Biden has shifted his focus to the gun violence problem. Meanwhile, his team continues to pursue the president's financial agenda, a $2 trillion infrastructure plan.
Vaccination in the US is well underway. At the same time, Europe banned AstraZeneca vaccine inoculations for the majority of adults. All this may slow down the pace of the vaccination campaign. The infection rate in the euro area remains at the highest levels. This means that the country is unlikely to lift lockdown restrictions. No matter how hard the EU will try to adapt to new circumstances, it will not be able to avoid consequences. All this may lead to a depreciation of the euro.
The eurozone's economic data is so mixed that it raises concerns. On Friday, Germany revealed a sharp decrease in industrial production, while Italy recorded a spike in retail sales.
Germany's industrial output plunged by 1.6% month-on-month in February, while economists had forecast an increase of 1.5%. If EUR/USD closes below MA 200 or below 1.880 at the end of the week, pressure on the pair will increase next week.
As for the euro's attempts to recoup losses this week, they may turn out to be false. At the beginning of April, the price is moving against the trends that dominated the market at the start of the year. Market participants should not ignore this reversal. Next week, the greenback is likely to strengthen. If all this is about the beginning of a new market cycle, demand for safe haven assets will increase.
Meanwhile, TD Securities experts suggest that the US dollar will start falling in April amid rising expectations of a global economic recovery. In such a case, demand for safe havens will decrease.
According to UBS Global Wealth Management, the greenback will be weak in 2021 because the markets will have to review their expectations about interest rates in the US. The Fed is committed to keep its monetary policy unchanged through 2023. At the same time, the Fed futures market anticipates one interest rate hike in the end of 2022 and two more in 2023.
Commerzbank also doubts the ability of the greenback to strengthen. An impressive pace of the vaccine rollout in the US is unlikely to provide long-term support for the dollar.
