Euro traded in a narrow price range last Friday, mainly due to traders taking a wait-and-see attitude amid opposing scenarios around the EU economy. On the one hand, there is a fairly good recovery and optimism in the German business community, while on the other hand, problems with the EU vaccination program and bureaucratic delays in the implementation of the Recovery Fund limits the growth of the eurozone economy, making it more lagging behind other developed countries.
According to ECB chief economist Philip Lane, economic recovery in the EU relies heavily on fiscal policies. Therefore, support programs should not be delayed nor withdrawn earlier than expected. "It is important that the fiscal policy counters the effects of the pandemic. It should not constrain the productive capacity of companies, but provide them the necessary conditions for a timely recovery, "Lane said.
Aside from that, vaccination programs also affect recovery. So if the current slow pace persists, the EU will have a hard time pulling itself up from the crisis. Not to mention, there's bureaucratic delays on the implementation of the EU recovery fund, which, if continues, the goal set by authorities will not be achieved within the specific time period they. In fact, just recently, the European Central Bank intensified the volume of its bond purchases in order to control the growth of Treasury yields. It also published new forecasts, according to which the EU economy will return to its pre-crisis levels in mid-2022.
That being said, Lane stressed that short-term and long-term economic performance is inextricably linked, especially in the current environment. "A prolonged period of low economic activity is detrimental to the long-term productive potential of the economy," he claimed.
Of course, all this led to investors abandoning risk assets and returning to the US dollar, whose upward potential is now better amid good economic recovery in the US.
Talking about the United States, the Department of Commerce published a report last Friday saying that personal income and spending fell quite strongly in February. More specifically, incomes dropped by 7.1%, which is clearly higher than what economists had expected. Primarily, the decrease was due to the cuts in government benefits. Accordingly, personal spending slipped 1.0%, after rising by 3.4% a month earlier. And since income fell much more than spending, personal savings fell to 13.6%.
Meanwhile, consumer sentiment improved this March, rising to 84.9 points from a preliminary reading of 83.0 points. The Present Situation Index also jumped to 93.0 points, from 86.2 points last February. As for the expectations index, it increased to 79.7 points, which maintains rather good prospects for the economy.
With regards to EUR / USD, the fairly low volatility last Friday limited growth around the 18th figure. Therefore, a break below 1.1760 today will set off a further decline towards 1.1715 and 1.1680. But if the quote consolidates above 1.1802, the euro will trade in the direction of 1.1850 and 1.1930.
GBP
Pound continues to trade upwards, as confidence among investors and economists resumes growing amid brightening economic outlook in the UK.
Last week, a series of speeches by senior policymakers and executives highlighted divergent views on the UK economy. More specifically, Bank of England chief economist Andy Haldane said Britain is preparing for a quick recovery, while other government officials are pointing to the need for another stimulus program. But the statements of Treasury Secretary Rishi Sunak were on the side of traders who were waiting for signals on the curtailment of emergency support measures from the government.
Accordingly, these expectations that the Bank of England will wind up stimulus programs earlier than expected has caused a sharp drop in UK bonds. As a result, yields rose to the level at which they were before the pandemic. However, comments from officials eased expectations slightly, leading to a slight decline in yields.
The Bank of England also called on UK banks to support the economy by lending to businesses and the public. According to them, the whole banking system is strong enough to continue supporting households and businesses, especially since it has quite extensive lending opportunities due to the recent reduction of capital stocks, which banks need to keep on their balance sheets to cover potential losses.
With regards to GBP/USD, trading remains below the 38th figure, but a break above it will set off a jump towards 1.3850 and 1.3915. But if the quote remains below 1.3750, the pound will decline to 1.3705 and 1.3670.
