One of the best performing currencies today was the euro. After selling off quickly and aggressively in the first week of March from a high of 1.21 to a low of 1.1835, the single currency quietly consolidated above the 200-day simple moving average as dovish comments from the Federal Reserve and an overall demand for high-beta currencies halted the slide in the currency. As tempting as it may be to pick a bottom in EUR/USD, now is not the time to buy.
The Eurozone is mired in troubles. It has lagged the U.S. and U.K. in vaccine rollout and, as a result of that delay, new coronavirus cases are on the rise, forcing countries across the region to tighten restrictions. Earlier this month, Italy locked down for the third time and, over the weekend, France initiated a partial lockdown in 16 regions, including Paris. This morning, Germany extended its current lockdown to April 18 as all three countries get hit by a third wave. These restrictions that began as early as December in some countries has and will continue to take a significant toll on growth. According to the Bundesbank, the German economy contracted sharply in the first quarter – numbers that we will see next month. The European Central Bank knew this slowdown was happening and decided to accelerate asset purchases in March.
Looking ahead, Europe’s troubles aren’t expected to improve quickly. The decision by many nations to temporarily halt the AstraZeneca (NASDAQ:AZN) vaccine in early March created significant vaccine skepticism. With trust compromised, it will be an uphill battle for these countries to reach herd immunity. Until that happens, the central bank will remain cautious, growth will be slow and the euro should underperform other currencies. Economists are looking for improvements in this week’s Eurozone PMIs and German IFO report, but in light of more restrictions, the risk is to the downside for these reports.
Eventually, the vaccine rollout in Europe will gain momentum, leading to a stronger recovery and, at that point, EUR/USD could be a screaming buy. Until that happens, however, now is not the time to be going long euros, especially as the gap between German and U.S. bond yields widen.
Lower 10-year Treasury yields drove the greenback lower against most of the major currencies. Existing home sales also fell more than expected as supply dropped by the biggest amount ever. Homeowners are snapping up homes quickly, while potential sellers delay listings. Combined this has driven the median price of an existing home sold to its highest level ever. New home sales are due for release tomorrow.
After passing the $1.9-billion stimulus package, U.S. President Joe Biden is preparing a multi-part $3-trillion infrastructure spending plan that will be financed, in part, by higher taxes. More details will follow in the coming weeks and investors need to keep an eye on these developments because tax hikes could threaten the equity market rally.
While the euro traded higher, GBP/USD ended the day unchanged after bouncing off the 50-day SMA. This week is a big one for the currency with labor market, inflation, PMI and retail sales figures due for release. Improvements are expected all around, but the central bank’s cautiousness has made investors reluctant buyers of the currency. Tomorrow’s jobs report could change their minds. According to the PMIs, the manufacturing sector reported its quickest pace of job growth since June 2018. The construction sector reported the fastest since March 2019 and, while services employment continued to decline, the pace slowed.
The Australian and New Zealand dollars participated in the rally, but the Canadian dollar fell for the third day in a row.