EUR/USD - yield differential hits new high & puts gain value ahead of US wage growth data
- US-German 2-yr spread hit a new high in USD-positive manner.
- EUR/USD risk reversals turned negative.
The European Central Bank (ECB) removed the easing bias from QE language but countered it by saying rates would remain negative for an extended period. Also, President Draghi sounded cautious on inflation.
Consequently, the EUR/USD created a bearish outside day candle yesterday and fell to 1.2298. Further, the spread or the difference between the US two-year yield and the German two-year yield widened to a new record of 282 basis points. Clearly, the current levels in EUR/USD look unjustified.
Further, the EUR/USD one-month 25 delta risk reversals are being paid at 0.05 EUR puts vs. 0.10 EUR calls on March 7. It indicates the implied volatility premium for puts is more than that of calls, i.e. EUR puts are in demand.
So, an argument could be put forward that the rally in the EUR/USD from 1.2154 (March 1 high) has made a temporary high at 1.2446.
Focus on US wage growth figures
An above-forecast reading would boost the odds of a faster Fed tightening and could weigh over EUR/USD. Such a move would add credence to yesterday's bearish outside day candle and suggest the pair has topped out. Meanwhile, weaker-than-expected data could push the spot back to highs seen yesterday.
EUR/USD Technical Levels
As of writing, the spot is trading at 1.2310. A close above 1.2446 (previous day's high) would signal a continuation of the rally from 1.2154 (March 1 low) and open doors for 1.25 (psychological level) and 1.2556 (Feb. 16 high).
On the downside, breach of support at 1.2273 (50-day moving average) would allow a stronger sell-off to 1.2206 (Feb. 9 low) and 1.2154 (March 1 low).
Author
Omkar Godbole
FXStreet Contributor
Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.
