EUR/USD: euro outlook worsened


PMIs rose in Germany, France and the Eurozone as a whole in March. This is evidenced by the data published at the beginning of today's European session.

As reported in Markit Economics, the composite PMI of the Eurozone rose to 52.5 (against the forecast of 49.1 and 48.8 in February). A result above 50 indicates an acceleration of business activity and an improvement in the situation in the economy. Manufacturing PMI in March rose to 62.4 from 57.9, while PMI for services rose to 48.8 from 45.7. Earlier released (at 08:15 and 08:30 GMT) PMI indices for France and Germany also exceeded forecasts.

However, despite the exceeding expectations European PMI indices, investors are pessimistic about the prospects for the Eurozone economy amid renewed lockdowns and slow rates of vaccination. The euro also reacted rather sluggishly to the publication of PMI indices, and the EUR / USD pair declined again after a slight increase immediately after the publication of the indices, testing the key support level 1.1835 (see Technical Analysis and Trading Recommendations).

By the way, the Ifo Institute today lowered the forecast for the growth of the German economy. According to published forecasts by Ifo, Germany's GDP in 2021 will grow by 3.7%, not 4.2%, as the institute had expected three months ago. Germany's GDP is now expected to grow by 3.2% in 2022, up from the 2.5% projected in December.

"The crisis caused by the coronavirus continues, and this postpones the expected strong recovery in activity", Ifo analysts say, and the combined losses of the German economy, which is the locomotive of the entire European economy, will amount to 405 billion euros in 2020-2022.

According to them, Germany's GDP will grow by only 3.4% in 2021, "if sales of service companies directly affected by the pandemic remain at the low levels observed in the 1st quarter over the next three months".

Thus, the Ifo institute gave a less optimistic forecast not only for the prospects of the European economy, but also for the euro.

The German Institute for Economic Research (DIW) also sharply lowered its forecast for Germany's GDP growth for the current year to 3.0% from 4.0% earlier. According to DIW experts, the German economy will not return to pre-coronavirus levels of economic activity until early 2022.

Meanwhile, the dollar continues to strengthen, while the DXY dollar index continues to rise. A new positive driver of the dollar was the appearance in the media of information that the White House is preparing a new project of financial assistance to the economy in the amount of $ 3 trillion, moreover, by increasing the tax for large companies and for wealthy Americans. As of this posting, DXY Dollar Index futures are traded near 92.51 mark, which is the same as November 2020.

After a decline the day before, the yield on 10-year US Treasuries is rising again today and now stands at 1.629% against 1.754%, a local multi-month high reached last week.

During his joint speech with Treasury Secretary Janet Yellen in Congress yesterday, Jerome Powell again tried to calm the markets, which fear a rapid rise in US inflation due to the approval of a $ 1.9 trillion economic stimulus package. In his opinion, "the recovery is still far from complete, so the Fed will continue to provide the economy with the necessary support for as long as needed", although, "in general, the recovery is progressing faster than expected and seems to be getting stronger".

Today the head of the FRS will again speak in Congress on the topic of supporting the economy in a pandemic. His performance will begin at 14:00 (GMT). His unexpected statements may again increase volatility in the financial markets.

It is also worth paying attention to the speech at 15:40 (GMT) of the head of the ECB Christine Lagarde and the publication at 12:30 and 13:45 of the block of macro statistics for the United States. Orders for durable goods and capital goods, implying large investments, are expected to rise again. It seems that the growth of indicators continues after their recovery in previous months from a strong drop in March and April 2020, which should have a positive effect on the dollar quotes. Better-than-expected data will also have a positive impact on the dollar. Forecast for February: +0.8% (orders for durable goods), +0.5% (orders for capital goods excluding defense and aviation).