• EUR/USD is ending the week in the low 1.1900s, down more than 1.3% on the week.
  • That means the pair is set for its worst week since October 2020.
  • Further increases to the euros interest rate disadvantage ensured the single currency struggled against its peers.

EUR/USD has been going sideways over the past few hours in the low 1.1900s. After coming under strong selling pressure in wake of remarks by the Chairman of the Federal Reserve Jerome Powell on Thursday and losing its grip on the 1.2000 handle, the pair saw fresh selling during Friday’s Asia Pacific session, during which time its lost its grip on the 1.1950 handle. A strong US NFP report then sent EUR/USD very briefly under the 1.1900 handle, though this level was well defended.

On the day, EUR/USD trades about 0.4% or about 50 pips lower. That means the pair is set to close the week with losses of about 1.3%, its worst week since the final week of October 2020. That places the euro third from bottom in this week’s G10 FX performance table, with only JPY (down 1.7% versus USD) and CHF (down 2.3% versus USD) performing worse.

Why has the euro underperformed this week?

Yield differentials are the first thing to note this week. Whilst core European government bond yields have been broadly unchanged on the week (the German 10-year bond yield is roughly where they started the week around -0.30%, as is the French 10-year around -0.05%), bond yields in other G10 countries have rallied. For example, 10-year yields in the US are up about 15bps (from 1.40% to around 1.55%), 10-year yields in Canada are up about 10bps (from around 1.35% to 1.50%) and 10-year yields in Australia are up about 15bps (from under 1.70% to just under 1.80%). As its interest rate disadvantage was further widened against these currencies, the euro has understandably underperformed them.

One key reason as to why European government bond yields haven’t rallied much this week (and why the euro has suffered as a result) is likely the fact that the ECB has come across as much more eager to act in order to prevent yields from rising than the Fed; not all ECB members are on board with the idea of accelerating the pace of bank’s weekly asset purchases, but officials have left it very clear that they are “closely monitoring” movements in long-term interest rates. By contrast, the Fed have adopted a less aggressive stance; officials, including Powell, have noted that last week’s bond market moves caught their eye but there does not seem to be the same eagerness to do anything about it.

Elsewhere, in contrast with the US, UK and many other countries, the pandemic situation in Europe is not improving. In fact, according to the WHO, Covid-19 infections actually accelerated in the EU last week. Italy is tightening restrictions, France is still under curfew (which looks likely to be extended) and the threat of a return to full lockdown in Germany looms large, with current restrictions having recently been extended again.

European officials are worried about the spread of Covid-19 variants; the UK was ravaged by the “UK” variant over the winter which was as much as twice as transmissible and 30% more deadly. It seems as though the UK strain is becoming the dominant one in the EU. Meanwhile, the bloc’s vaccine rollout continues to lag that of major global peers.

This article was originally published by Fxstreet.com.Read the original article here.


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