A closer look at the impact of the latest COVID wave in Europe
EUR Under Pressure
The single currency has started the week on a softer footing with net sales across the early European session today. EURUSD is now sitting around 3% lower on the month as broad EUR weakness and a resurgent USD combine to weigh on the pair. One of the key risks to the Euro currently comes from the worrying developments within the COVID backdrop.
The World Health Organisation has noted that it is highly concerned over the current surge in infections in Europe. The WHO's regional director for Europe has warned that the winter cold and flu season, alongside lower vaccination uptake when compared with other parts of the world, means that Europe is highly susceptible to a further wave and acceleration of the pandemic.
Fresh Lockdown Risks
With many key economies in the Eurozone battling a burgeoning fifth wave of the virus, there are growing fears over how the winter will play out. Over the weekend, scenes of violence in various parts of the eurozone have highlighted the fears and frustrations playing out. In Austria, the government has announced a fourth nationwide lockdown to battle rising cases and is planning to make vaccinations mandatory, making it the first country to do so. The Netherlands has also gone back into lockdown, with both countries seeing protests and riots over the weekend in response to the announcement.
In Belgium, restrictions have been tightened (compulsory face-masks, COVID passes to enter hospitality venues) leading to fears that the country is also heading back towards lockdown. Over the weekend, protests in Brussels saw demonstrators clashing with police in scenes which were also echoed in Italy where protestors have been out in force.
Germany on Watch
The German government has warned that it might need to announce a new lockdown also as cases there continue to hit fresh highs. The French government is also monitoring the situation there as cases continue to surge. With nationwide lockdowns once again becoming a reality, the outlook for the eurozone economy over the coming months has weakened considerably. On the back of the supply chain issues and energy price crisis which have hit the block over recent months, fresh lockdowns are expected to take a considerable economic toll.
Dovish ECB Expectations
In light of this, ECB expectations have taken a dovish shift with any tightening expectations having been put on the backburner for now. Speaking on Friday Lagarde said that a rate hike in 2022 was unlikely and warned against premature tightening and the impact it would have on the eurozone economy. Ahead of the recent return of COVID concerns, Lagarde had been pushing back against arguments that higher inflation warranted a tightening response from the ECB, citing the expectations that current inflationary pressure would subside.
Divergence With The US
In the US, however, it is a different story. With solid and increasing vaccination rates, including ongoing success with the booster campaign, the risks of fresh lockdowns are very low. The Fed has already begun its policy normalisation with the announcement of tapering earlier this month and is expected to step up the pace of this operation as data continues to improve. Given the divergence in monetary policy expectations between the Fed and the ECB, EURUSD looks likely to remain skewed towards lower prices in the near term.
The break below the 1.1527 level in EUR/USD has seen the market quickly extend down to current lows around the 1.1350 level. Price is holding here for now though, with MACD and RSI both bearish here, the focus is on a continuation towards the 1.1190 level. To the topside, any correction higher will need to break above the 1.1527 level and bear channel top, to affect a bullish reversal.
This article was submitted by Tickmill.
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