The EUR/USD was steady while the GBP/USD hit a new multi-year high on Thursday morning, as the US dollar fell further with more global indices hitting new record highs with investors remaining hopeful that lockdowns will end hopefully in the not-too-distant future with many developed countries rolling out COVID vaccines. Keeping sentiment positive in times like now is ongoing central bank and government support. Investors are hoping this will offset the impact of the pandemic, revive economic growth and bolster corporate earnings.
Today we will hear from another major central bank as the European Central Bank takes centre stage. Not much is expected from the ECB after having just expanded its bond purchases at its previous meeting. But it will likely maintain its dovish rhetoric, providing support for European stocks.
Pound extends gains despite rising death rates
More on the ECB and the euro below, but it is worth keeping an eye on the pound which has hit a fresh multi-year high against the dollar with the GBP crosses all showing relative strength as well. The pound’s strong performance might look somewhat strange during times like now, with daily death rates hitting fresh records and hospitals running out beds for COVID patients. But it is worth remembering that since the EU referendum in 2016, sterling had been among the weakest of major currencies out there as some investors were obviously anticipating a no-deal Brexit outcome. As this didn’t materialise, it makes sense for the pound to regain some lost ground. The markets are ignoring short-term risks are looking ahead to more normal times. The UK’s ongoing success in rolling out the COVID vaccines, means it will probably be among the first developed nations to be able to end the lockdowns and other growth-chocking measures this year. As a result, we may see a sharp rebound in economic activity in the coming months.
EUR/USD may rebound despite dovish ECB
With regards to the euro, the ongoing risk rally has kept the EUR/USD exchange rate supported for now and we might see renewed strength if the ECB turns out to be less dovish than expected at its meeting today. I actually can’t see how the exchange rate will drop sharply today. For that to happen, the central bank will either have to provide more QE (unlikely) or be more explicit about how it wants to intervene in the FX markets to keep the euro undermined. This is something the ECB has never done before and is therefore also unlikely. Thus, the more likely reaction for the EUR/USD in my eyes is for it to show little response as the ECB will no doubt maintain its dovish rhetoric. But with other XXX/USD pairs rising amid the ongoing dollar selling, I am leaning more towards a higher move for the EUR/USD, along with stock indices.
