Euro Unfazed by Merkel’s Threat of 10 Weeks of Lockdown

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Euro Unfazed by Merkel’s Threat of 10 Weeks of Lockdown

Daily FX Market Roundup 01.12.2021

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

The resilience of euro is remarkable. The single currency ended the day higher against the US dollar and Japanese Yen despite German Chancellor Merkel’s warning that the lockdown may last for 8 to 10 weeks if the numbers don’t improve. She reportedly told her conservative party counterparts that “If we don’t manage to hold off this British virus, we will have a 10-fold incidence by Easter.” The government also warned that there could be no travel until late May. Germany reintroduced lockdown measures in early November but restrictions that include travel limitations, closures of schools and non-essential businesses were tightened this week. Lockdown until April all but assures another technical recession with a contraction in the fourth quarter of 2020 and first quarter of 2021. Euro should be much weaker but it continues to be supported by virus optimism, low interest rates, the persistent rally in stocks and lackluster demand for US dollars. We saw this same resilience in the fall when EUR/USD shrugged off early signs of a second wave. Will EUR/USD finally break down? Probably but it may take a more meaningful correction in stocks to draw away risk on flows.

Meanwhile sterling soared on the back of less dovish comments from Bank of England Governor Bailey. Despite the UK’s virus troubles, he expressed skepticism about the effectiveness of negative interest rates and that its too soon to talk about the need for more stimulus. As our colleague Boris Schlossberg reported earlier, Bailey said the idea was “controversial.” He also noted that the pandemic had a lessor than expected effect on inflation.

The US dollar gave back its gains amidst little economic data. There’s talk that the Federal Reserve could considering tapering sooner than previously suggested. With virus cases raging across the nation, its far too early for this type of speculation. Still Fed President Bostic continues to suggest that he’s in that camp in saying that prices are stronger than expected. US inflation numbers are due for release tomorrow – CPI is expected to be stronger than expected with gas prices and average hourly earnings on the rise. This week’s US economic reports should be firmer, keeping the possibility of a dollar recovery in play.

All three of the commodity currencies traded higher on Tuesday with the Australian dollar leading the gains. No major economic reports were released from any of these countries, leaving US dollar weakness and the intraday recovery in stocks driving demand for those currencies.

Kathy Lien
Managing Director

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