EUR/USD moves above 1.20 regions, as the ECB keeps rates unchanged and plans to have inflation below 2%. Bond purchase is to be increased at a higher pace.
EUR/USD Breaks Past 1.20 Levels
The EUR/USD currency pair has rebounded to above 1.20 levels after six weeks. The single currency finally managed to move above the 1.2100 marks during trading hours on Monday, April 26 but slipped lower to 1.2080 again on Tuesday. The area between 1.2075 and 1.2100 is strong resistance for the currency pair.
The euro to the US dollar is at the 1.2083 levels on Tuesday, which are the levels reached at the beginning of March.
Bond yields in the Euro zone have moved higher. The world market sentiment is improving, and growth is seen in the economies battered by the Covid-19. US Treasury yields were also a bit higher.
ECB Policy on Inflation
The European Central Bank's policy meeting was held on Thursday, and it was decided to keep rates unchanged and to curb rising bond yields. Though the economy has improved, there is much to be done to help countries recover from the pandemic, says the ECB head. Plans to improve the economy are helping the EUR/USD.
The ECB plans to bring inflation to below 2% by the end of the year and to push it lower by the next year 2022. Interest rates will remain unchanged until the inflation outlook improves say, analysts.
Fabio Panetta, an ECB member and the Senior Deputy Governor of the Bank of Italy, states that credit should remain cheap and policy support must be provided to countries. Inflation has to come down to 2% before withdrawing support.
ECB Steps Up Bond Buying
ECB President Christine Lagarde says that the bank will continue to buy bonds, as risks are on the downside. Planned buying will take place within the stipulated £1.85 trillion. The ECB has hinted that bond purchases will increase in the coming months. It will help to tackle the rising bond yields, says the ECB. The Pandemic Emergency Purchase Program (PEPP) for net asset purchase will continue until March 2022.
There are 19 euro area economies, and the monetary policy will help to rescue the countries affected by the pandemic. The vaccination drive may improve the health situation, as it will help to reopen the economy. Investors are happy that the EUR/USD is showing a positive trend, with improved health conditions.
President Lagarde says that the first quarter may show a contraction in economic activity. Measures are taken to improve growth in the second quarter. However, the economic outlook remains uncertain, states the ECB president. The third wave of the Covid-19 infection had restricted business activities during Easter, as the lockdown was announced.
Investment Gain Tax Strengthens EUR/USD
Investment gain tax may be hiked to 39.6% for Americans by the government. The money raised will be used for child care and to fund education spending. It has weakened the dollar and strengthened the euro currency.
The Biden administration wants to tax those who are earning more than $400,000 per annum. The proposal on tax hikes may be unveiled next week. It has further helped the single currency move higher while the US dollar is weakening.
Euro Economic Outlook
The German Business Climate report has not been good, as the third wave of coronavirus infection has hit the industrial sector. The Sentiment Survey in Germany has been disappointing.
Euro Retail Sales month-on-month has improved from -5.2% to 3.0%, much above market expectation with a growth of 1.5%. However, on a yearly comparison, it has come down 2.9%, with lower domestic trade in countries like France, Germany, Spain, and Italy. Extended restrictive measures to curb the spread of the coronavirus have resulted in poor retail sales.
The ZEW Economic Sentiment for the European region has portrayed lower activity coming down to 66.3 in April from 74.0 previously, a drop of 7.7 points, as there is deterioration in economic activity from lockdown restrictions.
Industrial Production month on month has come down from 0.8% to -1.0% in March. It is the largest decline in the eurozone industrial activity. The decline is the highest since April 2020, when the pandemic first began.
Trade Balance in Europe has come down from 28.7 billion to 18.4 billion, a decline of 10 billion. Weak economic sentiment is holding the EUR/USD within the crucial 1.21 levels.
Coronavirus Inoculations Accelerate
The pace of the Coronavirus inoculations has increased in Europe. It is expected to accelerate further in the coming days. The European Union has set a target to provide immunity jabs to adults so that at least 70% will receive the vaccination by summer.
The US Dollar index remains below the 91.00 marks. There is a rebound in the US Treasury yields with the coronavirus affecting the economy. The trade conflict between the US and China is another issue that is painful to the economic conditions in the country.
EUR/GBP is slightly above at 0.8700 levels. The general trend is weak after the Brexit. The vaccination program in the United Kingdom has been good.
The US Dollar has weakened to below 91.00 levels and has helped to strengthen the single currency. The US Dollar index moved to 90.78 levels on Monday but has recovered slightly towards 90.89 levels.