The Eurozone is mired in troubles. It has lagged the U.S. and U.K. in vaccine rollout and, as a result of that delay, new coronavirus cases are on the rise, forcing countries across the region to tighten restrictions. Earlier this month, Italy locked down for the third time and, over the weekend, France initiated a partial lockdown in 16 regions, including Paris. This morning, Germany extended its current lockdown to April 18 as all three countries get hit by a third wave. These restrictions that began as early as December in some countries has and will continue to take a significant toll on growth. According to the Bundesbank, the German economy contracted sharply in the first quarter – numbers that we will see next month. The European Central Bank knew this slowdown was happening and decided to accelerate asset purchases in March.
Eventually, the vaccine rollout in Europe will gain momentum, leading to a stronger recovery and, at that point, EUR/USD could be a screaming buy. Until that happens, however, now is not the time to be going long euros, especially as the gap between German and U.S. bond yields widen.
After passing the $1.9-billion stimulus package, U.S. President Joe Biden is preparing a multi-part $3-trillion infrastructure spending plan that will be financed, in part, by higher taxes. More details will follow in the coming weeks and investors need to keep an eye on these developments because tax hikes could threaten the equity market rally.