EUR/USD 1.20; will or won’t it break? The common currency remains under pressure today, extending the move down that started yesterday in early European dealings. At the same time, the dollar is relatively well bid, along with the Japanese yen in a sign risk sentiment is more fragile than European equities (rising about half a percent) suggest. Wall Street opens with minor losses. Tech underperforms. EUR/USD’s leg lower (from 1.203) finds support near the 1.20 area but we admit that it looks shaky. The trade-weighted dollar is advancing marginally for a second day straight from 91.24 to 91.34. It has now recovered about half of the hit it took at the start of the week. USD/JPY is balancing on the 108 pivot. Neither the USD or the JPY is able to tilt today’s balance of strength in one way or the other. Markets are on edge as they watch the virus spread rapidly in the likes of India. Experts are also unsure whether current vaccines are as effective against the Indian virus mutation as they are against others. The looming ECB meeting tomorrow is another element possibly keeping euro bulls in particular in line. Lagarde has reasons for optimism, especially regarding the vaccination pace that finally picked up in Europe and offers an actual way out of the crisis. However, a Euro Area GDP-weighted 10y bond yield – one of the closely watched indicators – has been rising towards recovery highs again in recent days. Underlying dynamics show real yields were the driving force. Therefore, the ECB president probably doesn’t want to sound over-optimistic and give an “all clear” for a continued yield surge. She might focus on the risks to growth and inflation instead and warn the pandemic isn’t over yet. Questions about the PEPP pace going forward (ie Q3) are very likely. Lagarde repeatedly said however that any decisions regarding will be taken on meetings accompanied by new growth and inflation forecasts. The Hungarian forint is a heavy underperformer in the CE region today. EUR/HUF jumps towards 363 from 361.30. Hungary proposed some tweaks to legislation which the EU’s top court last year labeled in violating of the bloc’s rules. But it is feared the adjustments won’t suffice, keeping Hungary on collision course with the EU.
The upcoming ECB meeting might also explain today’s minor Bund outperformance vs. US Treasuries. The Bund started on weak footing with yields at some point more than 2 bps higher but soon found its composure. German yields fall for a second day though losses are limited to 1 bp at the long end of the curve. Spreads vs. Germany’s 10y yield tighten no more than 1 bp across the European periphery. UST’s reversed early weakness into minor strength similarly. Yield changes compared to yesterday are negligible.
The German Federal Constitutional Court today cleared the road for the country to ratify the EU recovery Fund as it rejected an emergency procedure from a group of plaintiffs. The underlying dispute is still subject to a court inquiry. However, the Court assessed that while ‘the case isn’t per se inadmissible or without merit’ based on a summery examination, it does not appear highly likely that the court will find a violation of the German constitution. As the case remains open, the Court had to balance the impacts of granting or rejecting the bid for preliminary injunction. In this respect the Court judged that delaying ratification could undermine the goals of program to fight the consequences of the pandemic.
Polish March eco data as published today mostly surprised on the upside. Industrial output jumped an impressive 18.6% M/M to be up 18.9 Y/Y, the strongest reading since May 2006. Manufacturing production rose 20.9% Y/Y. Average wages also beat market expectations with a rise of 6.5% M/M and 8.0% Y/Y. Underlying price prices also continue to build with March PPI rising at a stronger than expected 1.3% M/M and 3.9% Y/Y (from 2.0%). Average payed employment declined slightly (-0.1% M/M and -1.3% Y/Y). The data had only limited impact on the zloty. At EUR/PLN 4.555, the Polish currencies maintains it recent consolidation pattern.