EUR/USD: 10-year US-German yield spread hits 3-month high ahead of US CPI

EUR's recovery from 21-month lows reached last Thursday contradict the widening of the US-DE yield differential.
A better-than-expected US CPI will likely push EUR back into the bearish territory below 1.12.

Omkar Godbole FXStreet Contributor

EUR/USD's recovery from recent lows below 1.12 could be short-lived, as the yield differential is widening in the EUR-negative manner.

The pair is currently trading at 1.1260, having hit a high of 1.1274 earlier today. The recovery from the low of 1.1176 seen on Thursday is likely a result of risk reset in equities and more importantly, contradicts the widening of the US-German bond yield differential.

The spread between the 10-year US and German (DE) government bond yields is currently seen at 259.2 basis points - the highest level since Dec. 18. Notably, the spread is up five basis points from the low of 254 basis points seen on Friday. So, EUR/USD's bounce from 21-month lows looks like a bear trap.

The benchmark bond yield spread may widen further in the EUR-negative manner if the US consumer price index for February, scheduled for release at 12:30 GMT, betters estimate.

Technically speaking, the move back above 1.12 has weakened the bearish case put forward by Thursday's close at 1.1193. With US-DE bond yield spread rising, the EUR is not out of the woods yet and could again close below 1.12 on strong US data.

That would imply a downside break of the multi-month trading range of 1.12-1.15 and open the doors to 1.10.

Technical Levels

1. R3 1.1299
2. R2 1.1279
3. R1 1.1262
PP 1.1242
1. S1 1.1225
2. S2 1.1205
3. S3 1.1188

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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