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#1 03-03-2021 10:25:38

johnedward
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From: Paris - France
Registered: 21-12-2009
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EUR/USD: the euro is under pressure, even though ECB is ready to act

EUR/USD: the euro is under pressure, even though ECB is ready to act


The euro has been trading with a bearish tone on the currency dashboard lately. The common currency has fallen against the USD and the JPY, and this trend seems set to continue.

The European Central Bank (ECB) is increasingly concerned about the strength of the euro, although the euro's real effective exchange rate, when based on the Purchasing Power Parity Index (PPI), indicates that the strength of the euro should not be a cause for concern. However, long yields are a concern for the central bank, which is why market participants expect the ECB to increase their daily PEPP purchases this week. Whenever this happens, if other central banks don't take similar action, purchases are expected to weigh a little more on the euro.

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EURUSD back to 1.20

The unwanted rise in bond yields is not something the ECB wants. Bond yields rise when investor optimism rises, as is the case now that the worst of the virus situation seems to be behind us.

The benchmark exchange rate for all traders against the strength of the common currency is the EUR/USD exchange rate. It has recently fallen by more than two hundred pips in three days, thanks to both a strong dollar and a weak euro.

While the ECB is worried about rising yields, we can't say the same about the Fed. In fact, Fed Chairman Powell used congressional testimony last week to reassure markets without suggesting that the Fed will increase asset purchases. Remember that the price of a bond and its yield have an inverse relationship. Therefore, when yields rise, bond prices fall, and vice versa. Now that yields are rising, if the Fed increases bond purchases, it will automatically trigger a decline in yields.

For the ECB, it's different. The central bank has made itself heard lately, especially last week, when it expressed its willingness to do more. Therefore, increased bond purchases in Europe should weigh on yields - and on the common currency as well.

For traders, this means that the euro is likely to be under pressure in the coming days/weeks, if the ECB's purchase is not accompanied by similar actions from other central banks.

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