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Jan 10 - 11:55 AM

EUR/USD - COMMENT-EUR/USD May Be Due For Big Gains If A Key Correlation Re-Engages

By Christopher Romano  —  Jan 10 - 09:50 AM

EUR/USD traded slightly positive Wednesday but remained within the Jan.
5 daily range as investors await key U.S. inflation and employment reports, but big gains may be in store if the correlation between German-U.S.
yield spreads and EUR/USD re-engages soon.

The dollar's yield advantage over the euro has been eroding sharply since Jan.
3.
Today 2-year German-U.S.
yield spreads US2DE2=RR broke above resistance near -174bps and traded their tightest since mid-August 2023.

EUR/USD and the 2-year spread typically have been positively correlated but that correlation has been broken since Jan.
3.

A tight range has held in EUR/USD since the New Year began as investors await U.S. December CPI and weekly claims data, which may impact Fed policy considerations.

Should the reports indicate inflation is getting closer to the Fed's target and that the jobs market is softening, U.S. yields are likely to sink, which could lead to further tightening of yield spreads.

The EUR/USD, yield spread correlation might then re-engage as investors price in Fed rate cuts and sell the dollar.

That could potentially allow EUR/USD to rally towards and possibly above December's monthly high.
A move above December's high would bring the 2023 yearly high into focus.

For more click on FXBUZ

Source:
Refinitiv IFR Research/Market Commentary

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