Friday's surprising euro strength despite Federal Reserve Chair Jerome Powell announcing a very hawkish outlook for U.S. interest rates suggests that yield spreads are a key driver for EUR/USD nL1N30219A.
The Click here currently prices the chance of a 75 basis-point Fed hike on Sept 21 at 64%, up from 47% on Aug 19.
EUR/USD closed down just 0.07% on Friday and both the euro and U.S. dollar surged against other major currencies.
The euro strength was triggered by a report that some European Central Bank policymakers want to discuss a 75bpsrate hike at the September policy meeting, even if recession risks loom, as the inflation outlook is deteriorating nL4N3014BB.
While no ECB policymakers are calling for 75bps at present, the mere fact it could be discussed had a large impact on euro zone yields and the euro.
Yield spreads tightened as 10-year Bunds climbed 7bps to close at a fresh 1.398% trend high on Friday, while 10-year Treasury yields ended just 1bp higher at 3.035% after Powell.
Friday's price action shows how sensitive the euro is to ECB expectations.
Should the idea of a 75bps ECB hike gain traction, popular EUR shorts would likely be squeezed.
EUR/USD charts are bearish, as 10 and 21 daily and weekly moving averages fall, while 21-day Bollinger bands expand for another test of last week's 0.9900 low. A close above the 1.0128 21 DMA would be a positive signal.
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