Finally, we are at the last trading day for the first quarter of 2021. The common currency lost the height this quarter on the continued signal that rate differentials continue to support the US dollar. Financial markets have spent the past three months pricing the inflation forecast as US and Germany yield shooting higher. Rising economic optimism is the reason behind the faster rally.
Bonds:
Since August 2020, US Treasury yields have been rising, but the real move started at the beginning of 2021, as the magnitude of the rise betting faster and thicker. Last August UST 10-yr rate bottomed around 0.5% and now closed at the highest level in three years at 1.74%. The US Treasury yield curve had steepened significantly, led by the long end, reflecting an increase in both inflation expectations and real rates, as per ECB.
Besides, 10Year Germany yields closed at -0.315%, up 1bps on Monday and been rising since December 2020 low -0.61%. The Germany 10 Years / United States 10 Years Government Bond spread value is -202.9 bps, as per Worldgovernmentbonds.
On Monday, US 10yields rallies strongly to 1.74%. Unsurprisingly, we forecast this move in early 2021. But at what rate the EURUSD would driver further lower to 1.1600-1.1500 levels. The rise in US 10yields and fall in EURUSD will go hand in hand. We believe a move above 2% in UST 10yr could shake the EURUSD in the coming months.
FX:
We are at a little above a year since EURUSD bottomed on March 23, 2020. Since then, the cross has produced a magnificent rally of a little over 10%. When you zoom back to quarterly performance, the EUR lost more than 4% against the dollar.
As shown on the below chart EUR, outperforms against three crosses but fell against 6. Overall, the average is 2% lower. Throughout this quarter, we recommend long EURCHF and change the course of EURUSD in February. Recently added the cross EURGBP in the neutral category from a bearish view.
Looking ahead, we still recommend long EURCHF and dip-buying in EURGBP around 0.8400. Despite the latest 4% retracement, we continue to underweight EURUSD.
Macros:
Latest Flash Eurozone PMI data signaled the first expansion in business activity for six months in March, as per IHS Markit. And as per the official release latest Germany flash, PMI data pointed to a solid rise in private sector activity during March. Here is the flash PMI’s for Germany and EA, and they suggest strong growth has been seen in the EZ.
Looking ahead, inflation and PMIs should focus closely. Besides, US payrolls could dominate the EZ zone. Our key focus remains on EZ CPI figures.
Moody’s Analytics said, “We expect the inflation rate to rise to 1.2% y/y in March from 0.9% in February. Core inflation was likely unchanged following ongoing lockdowns that suppress consumption, particularly of services. However, as of March, the energy index will start contributing to the headline inflation rate.”
TECHNICAL OVERVIEW
EURUSD was rangebound during last week with no important moves. The pair managed to keep the previous week low and is now holding at 1.1750.
We expect EURUSD to trade in 1.1700-1.2000 in the week ahead.
Highlights for the March month are 1. EURUSD lost 200MA 2. EURGBP enters into the support zone. 3. EURNZD elevated to 100MA 4. EURSEK testing 200MA for the 1st time since September 2020. 4. EURCHF consolidation continues.
We expect EURUSD to find support near 1.1700 while resistance is visible at 1.1900 and 1.2000 marks.
It is important to always keep in mind the risks involved in trading with leveraged instruments.
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