EUR/USD has entered a consolidation phase while it trades in the 1.2150/1.2250 range.
This can be a healthy development for the bull trend, but risks from the euro zone rate complex, and the ECB, could put the prevailing advance in doubt.
EUR/USD's rally off the March low caught a tail wind from diverging U.S. and German bond yields.
After nearly tagging 1.80% in late March, the U.S. 10-year yield US10YT=RR corrected lower, and then held familiar turf, mostly in the 1.525%/1.75% area.
Meanwhile, German 10-year yields DE10YT=RR rallied sharply from their March 25 -0.39% low to a peak of -0.074% on May 19.
December 2022 Euribor prices FEIZ2 dropped from their April 8 100.54 peak to a low of 100.43 on May 20.
German yields are now falling, while Dec 2022 Euribor is rallying sharply from support.
This slide in rates is helping to stall EUR/USD's rally.
With this, ECB President Lagarde provided more reason for EUR/USD bulls to pause.
Today she said the ECB is closely monitoring the rise in yields, and that the ECB is committed to preserving favorable financing conditions nF9N2KZ01N.
This has further depressed euro zone rates, driving EUR/USD sharply lower.
Should euro zone rates continue to slide, while the pace of the ECB's PEPP program increases, EUR/USD downside risks will move to the front burner, and its rally off the March low will be in doubt.
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