A sharp decline in risk sentiment and an increase in Treasury yields, noted at the beginning of this week, spurred demand for defensive assets and forced the US stock market to retreat from the peak levels reached earlier.
This decline was largely due to the increase in COVID-19 cases globally, especially in India and Japan.
Last week, there was a record weekly number of coronavirus cases since the start of the pandemic, according to WHO.
In addition, the 10-year Treasury yield jumped to 1.631% on Tuesday, after hitting monthly lows of 1.533% earlier.
However, already on Wednesday, the key US stock indexes returned to positive territory, ending yesterday with growth after falling following the results of the two previous trading sessions.
The mood was improved by the statement of the owner of the White House, Joe Biden, that the United States managed to overfulfill the vaccination plan and by the 92nd day of his presidency reached the mark of 200 thousand vaccinated. Recall that the original goal was 100 thousand vaccinated in 100 days of the presidency.
Added to the positive side is the fact that Wednesday’s auction of 20-year US Treasuries sparked strong demand, helping the fixed-income market regain calm and restrict yields.
“There are still risks in the market, especially related to COVID-19 vaccination and virus mutation. Therefore, a somewhat volatile environment is likely to remain, ”analysts at The Goldman Sachs said.
Bank of America specialists, in turn, note that their model of 12-month market acceleration has begun to give signals to sell, and as a record number of investors gained long positions, they allow the S&P 500 index to fall by at least 10%.
So far, the market has escaped with only a slight fright. On Thursday, futures for the major US indices are consolidating at yesterday’s close levels.
The recovery in the US stock market and the decline in Treasury yields sent the USD index back into the red. At the same time, the EUR / USD pair found a local bottom around 1.1997 and quickly bounced out of the 1.2000 area, ending yesterday near 1.2030.
The single currency hit hard during the first months of the year, one of the main victims of the dollar’s strengthening, and is now trying to catch up.
MUFG expects the EUR / USD pair to rise to 1.2350 in the next month.
“Against the background of the weakening of the shock associated with the recent sharp jump in Treasury yields, players started buying risky assets again, and stock indices rose to new record highs. Risk appetite is fueled by optimism about the global economic recovery. Therefore, we believe that the EUR / USD pair will continue to grow in the coming month and again aim at the highs of this year just below 1.2350, ”the bank’s strategists said.
Experts The Goldman Sachs revised upward their three-month forecast for the euro against the US dollar (from $ 1.21 to $ 1.25), noting, in particular, the expected improvement in the epidemiological situation in the eurozone.
“Market forecasts for the European economy will improve over the next few months, thanks to an accelerated rate of COVID-19 vaccinations and a decrease in hospitalizations in the region,” they said.
Meanwhile, Capital Economics analysts argue that the EUR / USD recovery will be short-lived and still expect the euro to weaken further against the US dollar.
“We think that high rates of vaccinations, a decrease in the number of cases of infection with the virus and an earlier removal of restrictions will continue to put stronger upward pressure on government bond yields in the United States than in the euro area,” the experts said.
They believe that divergence in yields will support the dollar and predict that by the end of this year the euro will fall to $ 1.15 against the US currency.
Greenback continues to weaken against most of its main competitors. However, the decline in the dollar and the growth of the EUR / USD pair may soon stop, although it still maintains positive dynamics.
The strengthening of the US currency may be driven by the resumption of growth in Treasury yields and the acceleration of inflation in the United States.
The ongoing recovery in the US economy may support inflationary expectations.
Already, the consumer price index in the US is moderately above 2%, but many economists agree that these are just the first sprout of the impending price storm.
If the current inflation rate is maintained, the American Central Bank will have to switch to a cycle of monetary tightening much earlier than expected.
It is not excluded that already at the April FOMC meeting, the FRS leadership may sound concern about the growing inflation in the US, which market participants may regard as a signal to reduce short positions in USD.
However, the next meeting of the ECB is still in the focus of attention.
“Talk of a possible curtailment of asset purchases by the ECB has contributed to the euro’s growth this week, and Christine Lagarde may try to stop this speculation,” SEB experts said.
There are seven weeks before the next meeting of the regulator, and now the ECB will have to make a choice: take the opportunity and explain their signals to the markets in detail, or leave the estimates unchanged and wait for clearer evidence that European countries have “curbed” the third wave of the pandemic.
Since it is expected that following the April meeting, the ECB will maintain the status quo, all attention will be directed to the press conference of ECB President Christine Lagarde.
“We believe that the EUR / USD pair will remain in the current range, as the ECB is unlikely to give the markets any clear signals about further policy. Therefore, players’ attention will quickly turn to the upcoming FOMC meeting next week. In general, the optimistic message of the European regulator will provide only insignificant support to the main currency pair, ”analysts from TD Securities noted.
According to experts, the inability of the EUR / USD pair to develop growth above the Fibonacci correction level relative to the January-March decline and its failure in the area of 1.2055-1.2060, where the 100-day moving average passes, require players to be careful.
Only a pure breakdown of this week’s highs in the 1.2080 area will signal a bullish tone for the pair. Further resistance is located at 1.2100, 1.2160 and 1.2200.
Immediate support is at 1.2000. A breakthrough will bring into play the 1.1950 level, a pure breakout of which will indicate the extinction of the bullish momentum and trigger sales. This will set the stage for the pair to fall below 1.1900 and test the 1.1845-1.1855 area.