- EUR/USD's bounce from key 61.8% Fib support is backed by narrowing of US-German (DE) bond yield spreads.
- The two-year yield spread has hit lowest since April 2018 and could drop further ahead of the Fed, helping EUR/USD climb the immediate resistance zone of 1.1335-1.1350.
EUR/USD clocked a high of 1.1344 on Friday, the highest level since March 4, as weak US data pushed Treasury yields lower.
The US Empire State manufacturing index released on Friday showed that manufacturing activity has cooled sharply this month. The index came in at 3.7, down from 8.8 and missed expectation of 10. In response, the 10-year treasury yield fell below 2.6 percent, signaling a continuation of the fall from the recent high of 2.77 percent.
Further, the spread between the two-year US and German government bond yields fell below 300 basis points - the first since April 2018.
As a result, the greenback took a beating across the board and could slide even further today, as the two-year yield spread will likely narrow further on dovish Fed expectations.
The US central bank is widely expected to keep rates unchanged on Wednesday, but signal a reduced inclination to hike rates by lowering the projected path on interest rates to one hike in 2019 and one more in 2020.
So, the EUR could soon scale the immediate resistance zone of 1.1335-1.1350. That range has capped upside for the last three trading days.
However, with markets pricing in a 2020 rate cut, the bar of (dovish) expectations is set high and the dollar will likely pick up a strong bid if the central bank takes note of the recent improvement in the risk sentiment.
US-German two-year yield spread
EUR/USD Technical Levels
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