The risk of rising bond yields in developed and developing countries has not been discussed recently. Against this background, the world stock indices are strengthening, and the US dollar is doing its best to ignore any changes related to this direction. The EURUSD pair, after its rapid growth at the end of last week and the beginning of this week, seemed to freeze in the side channel, resting on its maximum of 1.2180. No matter how traders tried to take advantage of the fundamental indicators of the European economy, they could not get above this range. Today's German GDP data, which turned out to be better than economists' forecasts, was also ignored with great success. This once again allows us to hope for a more active economic recovery by the summer of this year, especially after the lifting of quarantine and restrictive measures.
In general, the balance remains on the side of buyers of risky assets, who are one step away from continuing the bull market. To do this, they need to break above the resistance of 1.2180, which will lead to a new upward wave of the trading instrument in the area of the highs of 1.2220 and 1.2260. Do not panic too much in the case of a downward movement of the euro in the first half of the day, as the nearest major support level is seen in the area of 1.2135. But even if this area is broken, you can also expect an increase in long positions in the area of 1.2090.
What is the relationship between bond yields and the foreign exchange market?
Returning to the topic of rising government debt yields in European countries and the United States, it should be noted that the global printing press, which over the past year minted about $ 9 trillion, makes many investors think about the level of inflation, a surge of which is expected in the near future. And although the leaders of the world's central banks strongly reject the idea of curtailing support programs, any acceleration of inflationary pressure will force them to reconsider their position. It seems that investors are thinking ahead and do not fully trust the statements of regulators. Everyone remembers 2014 when the Fed was so slow to change policy that it led to another financial collapse in the debt market. No one doubts that the printed money is aimed precisely at saving the world economy and bringing it out of the recession that it was subjected to due to the coronavirus pandemic last year. But rising bond yields and an expected rebound in consumer spending are forcing a very different view of inflation, which threatens central banks and their ability to rein in borrowing costs.
In a speech yesterday, Federal Reserve Chairman Jerome Powell already called the recent rise in bond yields a "statement of confidence" in the economic outlook and the actions of central banks. Christine Lagarde, the head of the European Central Bank, also spoke out, as a sharper rise in yields threatens the already weak recovery of the eurozone economy.
Lagarde noted that she and her colleagues are "closely monitoring" the yield on government debt. The Bank of Korea has also warned it will intervene in the market if borrowing costs rise, and the Australian Central Bank has been forced to resume bond purchases to ensure its target yield remains unchanged. The Reserve Bank of New Zealand, which today promised to extend the stimulus period, is not far away. Let me remind you that the European Central Bank increased its bond repurchase last week, using its emergency asset repurchase program.
So how will this affect the world's currencies? Most likely, it is for this reason that we are seeing a stupor in the EURUSD pair since investors have no guidelines. On the one hand, maintaining a super-soft monetary policy seems to have a positive effect on the economy, on the other hand, sooner or later we will have to pay for those actions that will lead to excessive overheating of the economy due to a sharp increase in spending, which will certainly jump thanks to cheap loans. The only way out will be to raise interest rates, which will attract new players and investors to the market. Who will do it first – in that direction and the market will swing. Of course, the Federal Reserve will be the first to announce the curtailment of the bond purchase program, as the US economy is doing the best and showing good growth rates even during the second wave of the coronavirus pandemic. Therefore, the risk of an expensive euro, which was mentioned by the European Central Bank last year, will be offset by the future actions of the US regulator. In any case, while there are no benchmarks, volatility will remain at a low level, and sharp price changes in the foreign exchange market will become the norm by the summer of this year.
A little bit about the numbers
Today's data on the German economy allows us to give very optimistic forecasts. According to Destatis, the German economy grew more than initially expected in the fourth quarter of 2020. The growth was driven by new investment in construction and stronger exports. Gross domestic product in the 4th quarter increased by 0.3% compared to the 3rd quarter after a preliminary reading of 0.1%. Let me remind you that in the 3rd quarter, the growth was 8.5%. On an annualized basis, the decline in GDP slowed to 3.7% from 4.0%. Compared to the same period in 2019, GDP decreased by 2.9%. As noted above, the decline was observed in private consumption, where the indicator decreased by 3.3% due to the second wave of economic lockdown. Government spending also fell by 0.5%. Growth was observed in investment in construction by 1.8% and in foreign trade, where exports increased by 4.5%.
As for the less important statistics, it is worth paying attention to the data of the Insee statistical office, where it was indicated that sentiment in the French manufacturing sector partially increased, despite the ongoing health crisis. The manufacturing confidence index rose to 97 points in February from 96 points in January.
