Last Thursday’s drop in EUR/USD under 1.20 for the first time since December 1, 2020 was tremendously significant not just technically but also psychologically. It provided a stark contrast to investors that the Eurozone is lagging far behind the US (and the UK) in vaccinating its taxpayers against coronavirus and that any economic recovery will therefore probably lag behind too.
In recent months, the US Dollar has become the markets’ favorite safe sanctuary but when the worldwide economic recovery arrives it could well prove to be the leader on the way up also. As mentioned before, traders are convinced the currencies of countries which are ahead in vaccinating their citizens against the coronavirus, like the US and the UK, will be the first to recover economically from the downturn caused by the pandemic.
Meaning central banks such as the Federal Reserve and the Bank of England are also the first to begin tightening monetary policy, possibly while the European Central Bank is still considering a rate reduction to boost activity.
This is all bad news for EUR/USD, that is back to where the ECB would prefer it to be and could conceivably drop to the lows around 1.16 last seen in early November — although not, obviously, from the short-term.
WEEK AHEAD: GERMAN INFLATION, TRADE AND INDUSTRIAL PRODUCTION
Turning to the information in the week beforehand, there is little market-moving on the agenda. The highlight might be Wednesday’s closing German inflation data for January, expected to show a rise to 1.0percent year/year following the previous 0.3percent fall. Otherwise, German and Eurozone industrial manufacturing and German commerce figures are on the calendar too.
