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Apr 10 - 12:55 PM

MUFG: The 2-year EU-US Swap Spread Points to EUR/USD below 1.05

By eFXdata  —  Apr 10 - 12:00 PM


MUFG's recent analysis of the EUR/USD exchange rate in relation to the 2-year EU-US swap spread since the onset of the COVID-19 pandemic indicates a significant divergence, suggesting that the EUR/USD pair should be trading below 1.0500. This divergence is the largest observed since the late 2021 to Q1 2022 period, which was characterized by a global inflation shock and geopolitical tensions due to Russia's invasion of Ukraine.

Key Points:

  • Divergence in Swap Spreads: The current gap between the EUR/USD spot rate and the 2-year EU-US swap spread is at its most pronounced since the period of significant global economic upheaval in late 2021 and early 2022.
  • Implications for EUR/USD: Based on historical correlations between the swap spread and the EUR/USD rate, the current swap spread favors US yields and points to the potential for EUR/USD to move significantly lower.
  • Historical Context: The analysis reflects on a similar divergence observed in 2022, which eventually led to a downward adjustment in the EUR/USD rate, aligning it with the direction indicated by the swap spread.


MUFG's analysis suggests that the EUR/USD pair is currently overvalued when considering the 2-year EU-US swap spread, hinting at a potential adjustment towards levels below 1.0500. Should the swap spread continue to move in favor of US yields, it increases the likelihood of a more pronounced downward movement in the EUR/USD exchange rate, underscoring the importance of swap spreads as an indicator for currency market movements.

MUFG Research/Market Commentary


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