Treasury yields continue to rise, which seriously affects the rate of the US dollar. In fact, judging by the statements of central banks, the tension on this issue is quite high, forcing investors to continue taking on the dollar as a safe-haven asset, especially in the medium-term.
At the same time, discussions on the new stimulus are underway. Democrats are rumored to be abandoning their proposal to raise taxes on large corporations that do not increase the minimum wage of employees, in order to soften criticism from Republicans in the US Senate. Concessions on this issue are expected to increase the chances of pushing the $ 1.9 trillion bailout bill through the Senate and Congress.
Consideration of the bill will begin tomorrow and the final vote will take place late Thursday evening.
Going back to Treasury yields, recent statements from the European Central Bank and Federal Reserve boil down to one thing: bond yields, which continue to grow, create quite serious difficulties on the way to economic recovery.
"The European Central Bank can and should counteract any undue increases in bond yields that threaten to undermine the eurozone economy," said Francois Villeroy de Galhau, current governor of the Bank of France. His comment can be put on a par with recent statements by other ECB officials who are concerned that investors will continue to gamble on tighter monetary policy conditions in the near future.
But as seen on the chart, the European Central Bank slowed its bond purchases last week, which runs counter to its recent announcements. Yields rise when long-term government bonds are sold, especially since investors await higher rates following a tightening of policy. And interestingly, the ECB purchased bonds worth € 12 billion euros last week, after purchasing bonds worth € 17.2 billion a week earlier. In short, what they said is different from what they are doing.
To add to that, Villeroy said the ECB should increase bond purchases as part of its emergency assistance program to reduce yields. And, if necessary, adjust other instruments such as the deposit rate.
Fed officials are following roughly the same strategy. In yesterday's speech, Richmond Fed President Thomas Barkin said the Federal Reserve will continue to try reassuring investors who are expecting "big changes" in the near future.
Barkin downplayed the recent volatility in the Treasury market, saying that the US central bank is not too worried about this. He then tried to transfer the topic to the labor market, which, according to Fed Chairman Powell, is still far behind the overall economic recovery. For this reason, changes in central bank policy should not be expected in the near future.
In any case, US Treasury yields rallied last week, with 10-year yields hitting their highest in a year, as investors reevaluated the outlook for a stronger than expected recovery and assessed the likelihood of a future Fed rate hike.
"We are in control of the yield curve in the short term. Meanwhile, in the long term, it is not really necessary as it depends on the driving force of the economy, "Barkin said.
With regards to statistics, consumer prices in Germany continued to rise this February, but at a higher level than predicted. This indicates that the German economy is starting to recover faster, after the second wave of the coronavirus pandemic. CPI rose 1.3% year-on-year, a bit higher than the expected 1.2%. Prices also rose for the second month, increasing by 0.7% this February, up from the expected 0.5%. Energy prices also grew by 0.3%, while food prices jumped by 1.4%.
As for Manufacturing PMI, the overall index rose to 57.9 in February, which indicates growth in the sector. To put it more precisely, manufacturing PMI jumped to 60.7 points in Germany and increased to 56.1 points in France. The sustained expansion of production is clearly helping offset the continued weakness in the services sector.
The same indicator increased in the US, which led to the growth of the US dollar against the European currency. US manufacturing rose to 60.8 this February, indicating growth in the sector. Then, tomorrow, data for the service sector will be released, which is expected to remain at 58.7 points.
As for Italy, consumer prices rose unexpectedly this February, climbing by 0.6% year-on-year, which is much higher than the expected 0.1%. Core inflation, excluding energy and food prices, rose to 1.0%.
With regards to the EUR/USD pair, bulls need to push the quote above 1.2040 in order to bring the euro towards the 21st figure. But if the price drops below 1.2040, EUR/USD will collapse to 1.2000, or even to 1.1960.