Euro Snaps Back But Dollar Still King

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Euro Snaps Back But Dollar Still King

Daily FX Market Roundup 03.31.2021

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

March was a tough month for the euro. The single currency fell to its weakest level in 4 months against the U.S. dollar and its lowest level in a year against sterling. Since the beginning of the pandemic, there have been major differences between how the U.S., U.K. and the European Union dealt with the crisis. Early on, Europe went into lockdown quickly while the U.S. dragged its heels which led to faster recovery and strong gains for EUR/USD between May and August. In the winter, they brought back restrictions before anyone else and kept them on longer than the U.S. and U.K. as their vaccine rollout faced setbacks. The currency and economies are bearing the consequences with EUR/USD falling from a high of 1.2350 in early January to a low of 1.1704 today.

EUR/USD rebounded on Wednesday as the selling became overextended and better than expected German labor data gave traders a reason to take profits ahead of Friday’s non-farm payrolls report. Despite today’s move, the dollar is still king as Europe’s troubles grow. With hospitals stretched to the brim, French President Macron announced a 4 week lockdown starting on Saturday because he said “we will lose control if we do not move now.” Schools will be closed, nonessential shops will shutter, movement will be restricted to within 10 kilometers and there will be a curfew from 7pm to 6am. Germany could be next as leaders of COVID-hit states call for tougher action. All of this means the contraction in the first quarter will extend into the second, giving investors very little reasons to buy euros. The 1.17 support level still looks vulnerable to a break.

The U.S. dollar extended its gains against the Japanese Yen as 10 year Treasury yields rise to 1.74%. In as little as 4 months, yields have nearly doubled. Stocks sold off slightly as investors await President Biden’s $2 trillion infrastructure plan. While higher taxes pose a risk for stocks, the spending plan will foster stronger growth and that’s what investors are focused on. The latest U.S. economic reports were slightly weaker than expected. Pending home sales fell -10.6% against -2.6% forecast, Chicago PMI beat but ADP reported job growth of only 517K against 550K estimate. The ADP number is still very good and with manufacturing activity accelerating, we look forward to a strong ISM number on Thursday and non-farm payrolls report on Friday.

The Canadian and New Zealand dollars ended the day slightly higher while the Australian dollar trailed behind. Canada’s GDP report was better than expected with the economy expanding by 0.7% in the month of January, up from 0.1% in December. The New Zealand dollar shook off softer business and consumer confidence while the Australian sold off ahead of tonight’s manufacturing PMI, trade and retail sales report. Last night’s building permits number from Australia was very strong, reinforcing the country’s healthy fundamental backdrop.

Kathy Lien
Managing Director

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