Crumbling correlations: EUR/USD & US-DE 2-yr yield spread

US-DE 2-yr yield spread at highest since 1999.
EUR/USD rises despite the widening yield spread.

Omkar Godbole FXStreet Contributor

The Fed is expected to hike rates three times this year, while the ECB is seen raising rates next year. Hence, the 2-year US-German (DE) yield spread continues to widen in favor of the USD. As of writing, the spread stands at 259 basis points - the highest level since 1999.

More importantly, the spread has risen 56 basis points since early September. Initially, EUR/USD fell from 1.20 (Sep high) to 1.1550 (Nov low) in response to rising 2-year yield spread. However, the chart below shows the correlation broke down in December.

While the spread continues to rise, the US dollar no longer follows suit, i.e. EUR/USD regained bid tone in mid-November and moved to 3-year highs above 1.22 today.

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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