EUR/USD: While the greenback looks superfluous at this celebration of life, it will feel great if the US leads the recovery

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Global markets remain optimistic and demand for risky assets is increasing.

The protective greenback on this holiday of life looks superfluous.

The dollar's sell-off continues for the second consecutive week amid expectations of an early agreement on additional fiscal stimulus in the United States and increased hopes for a global economic recovery.

The U.S. dollar index slipped to three-week lows on Tuesday, in the area of 90.1 points.

"Risk appetite sentiment and a weaker dollar continue to prevail," Bank of Singapore strategists said.

The US currency is not particularly helped by the increase in the yield of 10-year treasuries, which has already updated 11-month peaks, rising above 1.27%. Such dynamics traditionally support the dollar, but at the moment investors prefer more risky assets, which, in particular, includes the European one.

The EUR/USD pair reached the highest levels since the end of January, breaking the resistance in the form of a 50-day moving average (around 1.2150) on the background of increased risk appetite and thanks to positive news from Europe.

Problems with the supply of vaccines to the EU from the pharmaceutical companies Pfizer/Biotech, Moderna and AstraZeneca are finally resolved, and the supply of drugs to the region is resumed.

A macroeconomic report on the eurozone provided additional support to the pair.

So, the ZEW index of economic sentiment in Germany unexpectedly rose to 71.2 points in February, and in the euro zone - to 69.6 points (from 61.8 and 58.3, respectively).

In addition, the revised GDP of the currency bloc for the fourth quarter was slightly better than the previous estimate (-0.6% vs. -0.7%).

Another reason for growth comes from the United States. President Joe Biden is set to push through a $1.9 trillion bailout package and now has all the senators' attention that was previously distracted by Donald Trump's trial.

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It is assumed that the second major fiscal stimulus in the United States during the pandemic will push the growth of the national economy in 2021 significantly higher than expected, and an overabundance of productive capacity will lead to an acceleration of inflation in the country.

The Federal Reserve, as you know, will be willing to put up with exceeding the inflation target of 2%.

The European Central Bank, unlike its US counterpart, considers price stability as its main priority and considers the 2% threshold as a ceiling, not an average target level.

Jens Weidmann, one of the hawks of the ECB's Governing Council, believes that the central bank will have to abandon its stimulating monetary policy as soon as there are signs of approaching the inflation target.

Investors are now selling the dollar and buying the EUR/USD pair on declines, betting that the Fed will refrain from preemptive tightening and decide to wait and watch, while the ECB will be more difficult to contain if inflation exceeds the target level against the backdrop of a recovery in economic growth in the EU.

However, it is still unclear what excess of the inflation target is acceptable for the Fed and how long the central bank is willing to tolerate it. In addition, it is good to talk about inflation when there is no inflation. So, at the end of January, prices in the United States remained without significant changes. However, a question remains, how will the Fed's rhetoric change in the future, when the low base of 2020 will be overlaid with an increase in consumer demand.

A significant portion of the U.S. fiscal stimulus is expected to boost private consumption as vaccination, seasonality, and, ultimately, collective immunity allow forced savings to begin to be spent.

The "plan to save America" is gradually taking shape and promises to increase national GDP growth to the highest level in 37 years.

If the United States becomes the sole leader of the recovery, this will be a positive factor for the dollar and will lead to its broad strengthening.

"We expect the EUR/USD rate to be around 1.2200 in one or three months, but then decline to 1.1600 within 12 months," Danske Bank said.

"We believe the US economy should benefit from increased fiscal stimulus, progress in increasing vaccination rates, and potentially faster labor market recovery. In contrast, the eurozone economy is lagging behind due to the slow roll-out of vaccinations in the region and the negative impact of tailwinds," they added.

Realization of Danske Bank's forecast implies that greenback relative to current levels will strengthen against the single currency by about 5%.

The material has been provided by InstaForex Company - www.instaforex.com

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