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#1 26-02-2021 10:31:11

johnedward
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From: Paris - France
Registered: 21-12-2009
Posts: 3068
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EUR/USD: the euro's depreciation is possible...

EUR/USD: the euro's depreciation is possible after the latest of shift in the US's bond market


The euro is up against the USD. The EUR/USD exchange rate, the one complained about by the European Central Bank (ECB), is too high, fluctuating near 1.22 and is trading with an overbidding tone.

Part of this strength is due to US policy. Another part is due to European policy. No matter how you want to put it, one thing is certain: a huge divergence has been created in the markets, and the forex dashboard usually shows more volatility when this happens.

Three reasons why the euro is overvalued against the dollar

Before we begin, overvalued does not mean that the euro is about to depreciate against the dollar. In fact, quite the opposite could happen, as markets tend to remain divergent far more than traders are solvent. Therefore, before trading a fundamental theory, make sure that the markets move first, and that trading comes second.

Getting back to the point, it is obvious to everyone that the United States will lead the European Union in the deployment of vaccines. It's no surprise that the US has been getting more vaccines on time and the results are starting to show. So there will be a gap between the economic performance of the two regions.

Second, the US budgetary response is superior to that of the euro area. In fact, it dwarfs it. Third, the dollar has already weakened over the past year, but the euro has strengthened. So far this year, we see the dollar's downward trend continuing, as GBP/USD and AUD/USD pairs are trading at the highest level of the year, but euro pairs are not at their highest level. In fact, some euro pairs are at their lowest levels - EUR/GBP, EUR/AUD, EUR/CAD, to give a few examples.

Implications of higher yields in the US

The Fed reported this week that it has no intention of reducing quantitative easing. However, it will be constrained by the economy's outperformance this year and soaring inflation. Thus, when the Fed signals an easing through forecasts, US Treasury yields could reach 3% or more.

When yields rise, bond prices will fall as the Fed no longer buys. In addition, if it decides to unwind the balance sheet to unload the bonds, the Fed can sell them, putting even more pressure on yields.

This can be a blessing for the ECB. According to some models from different investment banks, a 3% increase in US yields by 2020 should lead to a drop of more than 10% in the EUR/USD exchange rate.

Often the positioning for such scenarios starts much earlier. Thus, no one should be surprised by the markets' anticipatory reactions.

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