- EUR/USD continues to trade on the back foot and has now convincingly lost its grip on the 1.1900 level.
- The recent drop was prompted by news that the Fed will not be extending SLR rules at the month’s end.
EUR/USD continues to trade on the back foot and has now convincingly lost its grip on the 1.1900 level, taking its close to two-week lows around the 1.1970 mark. On the day that means the pair is now trading about 0.3% or just over 30 pips lower on the day, with the bears now likely eyeing a test of the 2021 lows just under 1.1840 should the selling pressure continue.
Driving the day
The recent drop from the 1.1900 level towards 1.1880 has been prompted by news that the Fed will not be extending pandemic-era supplementary leverage ratio (SLR) rules at the end of the month – these rules had allowed banks to hold US treasuries and deposits on their balance sheets exempt from normal capital ratio requirements, a ruling the Fed decided upon in the early stages of the Covid-19 crisis order to stem excessive selling pressure in US treasury markets. The SLR rules will expire at the end of the month.
Wall Street banks had been lobbying for an extension of SLR and now face having to either reduce their holdings of treasuries (i.e. by selling US government bonds) or raise additional capital hold against these treasury holdings (i.e. by selling other assets) – thus the market reaction to this news is unsurprising, with US government bond yields rallying sharply off lows (the US 10-year is now flat on the day at 1.73% having been as low as 1.68%) and US stocks dropping (the S&P 500 dropped to 3900 and is down 0.3% on the day).
In terms of other news/themes of note for EUR/USD; Fed Chair Jerome Powell released an article on the WSJ, but it did not move markets given a lack of any new information on policy or the Fed’s outlook on the economy – rather the article seemed to be more of a recap of what has happened in the last 12 months in the global and US economy with regards to the pandemic and Powell’s justification for the Fed’s response.
Elsewhere, news regarding the Covid-19 pandemic in Europe continues to worsen; following the news that France would be tightening lockdown in 16 regions (covering 40% of the country’s GDP), the German Health Minister was on the wires this morning talking about how there isn’t enough vaccine supply to stop a third wave in Europe this summer. He predicted things could be as bad at Easter as it was over Christmas and revealed that AstraZeneca will be delivering fewer vaccines than expected in Q2. Various desks have been downgraded their forecasts the French economic recovery in 2021 as a result, a blow to the euro.
Meanwhile, despite the EMA’s review concluding that the benefits of the AstraZeneca vaccine far outweigh the risks, many European nations are not rushing to restart their rollouts of the vaccine, costing the bloc precious time in the race for herd immunity.