EUR/USD is extending its rally off October's 1.1433 EBS low and is likely to add to those gains as long as the rout in stocks increases the appeal of safe-haven Treasuries and keeps U.S. yields under downward pressure.
The 10-year Treasury yield has fallen sharply after peaking at 3.26 percent, tightening German-U.S.
spreads and helping to buoy EUR/USD.
The move lower in Treasury yields and short-term U.S. interest rate futures has led some traders to trim some very extended net-long dollar positions. If markets turmoil raises doubts about Fed rate hikes, especially after today's CPI downside miss, traders will pare longs further, adding upward pressure to EUR/USD. But EUR/USD's potential for gains may be limited by euro zone weaknesses.
German short-term interest rate futures are pricing in a less-aggressive rate hike path for the ECB.
Today's ECB minutes highlighted balanced growth risks but also potential for weakness due to trade tensions. Meanwhile, Italy's budget issues continue to simmer and are likely to heat up in coming weeks .
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