ECB still a big, fat dove

Nordea with the note:

There was broad support for the ECB to increase the pace of its bond purchases, but that support may wane, as the economic situation improves. We continue to see moderately higher Euro-area bond yields ahead.

The monetary policy account from the ECB’s March meeting indicated that there were no strong objections to the central bank’s decision to increase the pace of its bond purchases, though there was more discussion on how much the pace should be increased. In this context, it was argued that a more moderate increase in the pace would better reflect the assessment of more balanced risks to the outlook, also in the light of previous decisions when a similar pace had been chosen but economic conditions had been worse.

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Note the German versus US scale on the yield chart. Why anybody would want to own EUR defeats me.

That said, there is a risk here for DXY bull market thesis. It is this, via Goldman:

In a fresh Global Views, “Converging Higher,” Jan Hatzius highlights how growth in Europe is likely to accelerate similar to what we’re seeing in the US – once the region gets over the ongoing virus wave. Jari Stehn sounds a similarly positive tone in “Euro area: Rising Confidence in the Rebound.” Notably, daily new cases are now starting to decline, vaccine distribution is picking up, and business sentiment surveys are surprisingly encouraging. For the four quarters 2Q21 through 1Q22, we forecast Euro area GDP growth of 7.0%, similar to the 7.4% surge we are expecting over the same period in the US. And when the focus shifts to European-driven demand, the CEE-3 currencies and the Euro itself tend to outperform the most writes Michael Cahill in “Readying for a EuropeanRebound.”

I see this more as more a timing than fundamental issue. If the European rebound arrives as the US falls briefly off its fiscal cliff and before China slows, say, at the end of this year, then we could see a run higher in EUR and hit to DXY. The base case is that further into 2022, the next round of Biden stimulus adds another leg to US growth as Europe fades with China.  But there may be scope for a decent corrective rally in DXY in this mix.

David Llewellyn-Smith