The Euro is expected by several analysts to extend its period of weakness against the U.S. Dollar as delays to the rollout of the EU rescue fund combine with a slow vaccination rollout program and a rapid spread of covid-19 to cast a shadow over the Eurozone.
Euro Falling Behind the U.S. Dollar
In France, Italy and Germany Covid-19 infection figures are rising significantly suggesting a third wave of infections is now underway.
In Germany – the Eurozone’s largest economy – a total of 21,573 new infections were reported on Thursday March 25 which is 4,271 more than on Thursday a week ago.
The 7-day incidence – i.e. the total number of people infected with corona in the past seven days – jumped to 119.1 per 100,000 inhabitants.
The speed of new infections suggests that the nation’s relatively slow vaccine rollout will unlikely stop a new wave, which should defer any post-COVID economic rebound and reflect poorly on the region’s currency.
“As the eurozone continues to lag in the global vaccination race we expect EUR longs to continue to be taken off the table,” says Jeremy Stretch, Head of G10 Strategy at CIBC Capital Markets.
The call comes amidst a period of underperformance by the single currency that has seen the Euro-to-Dollar exchange rate retreat below the psychologically significant 1.20 level to test 1.1760 this week – its lowest level since November.
“The disbursement of EU rescue funds is an H2 story, at the earliest. Therefore, against the backdrop of a relatively small aggregate fiscal impulse, the longer the virus is seen to hold back the unshuttering of businesses the greater the EUR position correction,” says Stretch.
The NextGenerationEU recovery fund was agreed in May 2020 and sought to distribute €750BN across the bloc to mitigate the economic and financial impact of the covid-19 crisis. In the wake of the agreement, the Euro rallied analysts have cited subsequent delays to the fund’s distributions as a potential contributing factor to the current bout of Euro weakness.
The distribution of funds has been delayed by bureaucracy as national parliaments work through their own legislation to pass the plan. Meanwhile, the EU executive delays approval of certain countries’ individual spending plans.
It was reported on March 12 that the recovery fund has run into early trouble with the bloc’s executive arm judging that most national spending plans submitted so far still need work to get approved when approved. Economists expect the fund to boost economic activity in the region, which is said to support the Euro ultimately.
But the anaemic progress in passing the fund contrasts unfavourably with the rapid injection of generous sums of money in the U.S. where President Joe Biden’s administration is distributing up to $1.9TRN worth of stimulus support.
Analysts have said this boost to the U.S. economy is one reason why the U.S. Dollar is performing better than many had expected at the start of the year.
Eurozone growth prospects meanwhile remain subdued given a renewed spread of covid-19 across the bloc, leading to expectations that restrictions on economic activity will last longer than was previously expected.
“The prospect of renewed or extended lockdowns underlines downward growth revisions. A slower rebound underlines a more protracted period prior to the eurozone recovering to pre-pandemic activity levels,” says Stretch.