EUR/USD firmed on Thursday in an apparent bear-market bounce, given the negatives still stacked against the euro, but traders should monitor the risks of an eventual rally emanating from the U.S. Treasury yield curve.
Since dropping sharply on Sept.
13, EUR/USD has entered a consolidation phase that should resolve toward new lows, potentially testing key support near the December 2002 low.
Bearish risks are reinforced by falling monthly RSI, which is oversold but not diverging, indicating downside momentum remains.
Increased betting on higher terminal Fed rates should underpin the dollar, with March 2023 Eurodollar futures EDH3 hitting an eight-year low.
The still-substantial U.S. yield advantage allows the U.S. currency to shrug off slight tightening two-year Bund-Treasury spreads US2DE2=RR, unless ECB tightens more aggressively than expected.
But the inverted 2s-10s Treasury yield curve remains a fly in the ointment for the euro-selling crowd, since it tends to foreshadow recessions and Fed
rate cut cycles, as shown in the chart below from the St.
Louis Fed's FRED data base.
The question is timing, but a Fed pivot toward cuts should trigger a massive EUR/USD short squeeze.
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