The social transfers constituting the backbone of Joe Biden's fiscal package, the improvement of the epidemic situation and the gradual lifting of restrictions, the rapid progress of the vaccination program, as well as the marked improvement in the weather in March compared to the record cold and snowy February.
This combination of factors translates into a powerful rebound of the US economy. Importantly, it fuels risk appetite, pushes Wall Street to new historic highs, but does not bring nervousness to the debt market. As a result, the dollar is in defensive mode, and the EUR/USD pair rises to 1.20.
US retail sales skyrocket
Looking at the US economy and this week's most important macroeconomic data: retail sales in March jumped by as much as 9.8%, well above market forecasts and 30% higher than a year ago. Moreover, in the previous week, the number of new jobless claims fell below 600 thousand, while the average for the last four periods was 730 thousand. In April and May, the opening of the economy and deferred purchases should have the effect of sustaining robust consumption and further accelerating the recovery in the number of full-time jobs from the pandemic labour market slump.
The lack of reaction in the form of US Treasury yields increase despite such encouraging news is a negative omen for the dollar. At the same time, it may suggest that the EUR/USD exchange rate, which approached 1.20, may break through this barrier and continue to grow. The only chance for the dollar in the current situation would probably be an evident cooling of investment sentiment. In the long term, we are adversely optimistic about it. However, it should be remembered that in Q1, when the economic situation in the eurozone was again in trouble, the US economy grew at an annualized pace of well over 5%. The gap between the two conditions will widen for the time being, which creates fragile grounds for enthusiasm towards the euro.
At the beginning of the year, tensions in the bond market favoured the US dollar; their easing must be hitting it - since the beginning of the month, it has clearly gone on the defensive. We believe that the strengthening of the US dollar is just an episode and a break in its long-term downtrend, which began last year. Turbulence, reshuffling is going away and the dollar remains exposed in an unfavourable environment. It is created by accelerating global growth, which will fuel the already red-hot world's largest economic system and the gradual and uneven progress of vaccination programs. In such an environment, investors tend to be highly optimistic and flee the dollar for riskier currencies. On the other hand, this one will remain with high inflation, higher than in other countries, and zero interest rates. This means that real interest rates, or in other words, the interest attractiveness of the US currency, will be very low. The gigantic build-up of debt and the deteriorating balance of payments situation will also be an important burden over time.