Euro benefits from better vaccine rollout

Edward Bell - Senior Director, Market Economics
Published Date: 19 April 2021


The Euro has managed to stage a recovery in recent weeks with EURUSD now trading within sight of the 1.20 level last reached in early March. Part of the gains have been down to markets blinking in their stand-off with the US Federal Reserve and seemingly acknowledging that accommodative US monetary policy is here to stay, with lower UST rates and a potential softer dollar a result. Nevertheless, we believe that the disparities in the respective recoveries from the pandemic, and very different growth outlooks, mean that there remains downside risk for the single currency.

Alongside the loose monetary policy in the US, domestic variables in the Eurozone have also helped to give the single currency a boost in recent weeks. Since the start of April there has been a notable acceleration in the pace of Covid-19 vaccinations across major EU economies: a month ago less than 9% of the EU population had received at least one dose of the vaccine while as of mid-April the figure has risen to around 18%. Germany, France, Italy and the Netherlands have seen similar sized bounces and, the EU is at least now making some headway in vaccine distribution after a paltry start in Q1.

EU vaccinations are turning a corner

Source: Our World in Data, Emirates NBD Research

Nevertheless, the EU is still someway away from reaching its target of vaccinating a minimum of 70% of its adult population by “summer 2021”, at least compared with the UK or US which have so far administered single doses to around 48% and 38% of their populations respectively. Restrictions on the use of the AstraZeneca vaccine, which has been completely halted by Denmark and limited to older residents in many countries, along with a temporary halt on use of the Johnson & Johnson vaccine may put a brake on how fast vaccines can get out to the public over the coming months. We expected Q2-Q3 would be the time for vaccination programmes to reach critical mass in the EU but it looks likely that it will be toward the end of that period rather than the start.

When Q2 data shows the active pace of economic recovery we would expect to see the US economy still pulling well ahead of the Eurozone, particularly after what by all odds will have been another economic contraction for the bloc in Q1 2021. Healthy household balance sheets and an improving labour market will set the US up for a strong summer performance and hence we still see risk of EURUSD downside as a very real prospect in the next few months.

US poised to maintain edge in second half of 2021

Source: Bloomberg, Emirates NBD Research. Note: consensus forecasts.

How significant is ‘significant’

While there is clearly still much work to be done, with some vaccination light at the end of the Covid-19 tunnel, the outlook for growth in the EU may not be as perilous as previously thought. This week the ECB will set the tone for the Euro and while no change in policy rates are expected, markets will be watching for any indication that the bank will announce changes to the pace of its PEPP (pandemic emergency purchase programme). At its March 11 meeting, the ECB announced it would “significantly” raise the pace of asset purchases compared with the level in the first four months of 2021. In recent weeks, PEPP activity has picked up but only modestly: purchases have been EUR 16.5bn/week on average in the last three weeks compared with EUR 12.1bn/week from the start of the year until the March meeting.

Pace of ECB PEPP has picked up only modestly

Source: Bloomberg, Emirates NBD Research.

Too early to pull back on support

Some ECB members appear to be openly considering how and when asset purchases can be brought to an end with comments from Klaas Knot, the head of the Dutch central bank, suggesting PEPP could be tapered as early as Q3 and French central bank governor Francois Villeroy de Galhau discussing a potential “exit” to asset purchases. Given the still salient risks we believe that it remains premature for the ECB to pull back on supporting the economy and that asset purchases will stay at their current pace until at least the end of Q2. We would expect PEPP to remain in place at an elevated pace well into H2 2021, until at least more sustained signs of economic recovery appear, which will keep a lid on the euro’s gains.