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EURUSD: UST yields exert pressure on the euro

The EURUSD pair rose 0.29% to 1.2249 on Tuesday, May 25. Buying momentum for the euro was driven by macro data out of Germany, a decline in the US10Y, as well as gains in the EURGBP pair. EURUSD jumped to 1.2266, and EURGBP to 0.8672 at the start of the North American trading session. However, when euro crosses entered a correction, the single currency dipped to 1.2227.

Strong outperformance of the three IFO indices in May showed that optimism about the economic recovery in Germany is spreading across Europe. The yield on the 10-year Treasury narrowed to a two-week low of 1.552%, down from 1.62% at Monday's close. The decline in UST yields cushioned the euro's fall, allowing buyers to close at 1.2249.

Today’s macro schedule (GMT+3)

  • 17:30 US: weekly petroleum status report
1

Current outlook

At the time of writing, the euro was trading at 1.2240. Major currencies are showing choppy performance. Antipodean currencies top today’s leader board, with the kiwi dollar up 1.07% and the aussie dollar trading 0.33% higher. In early morning trading, the kiwi rose 84 pips against the dollar to 0.7316 after the RBZN announced its interest rate decision. The Australian dollar tracked these gains.

The RBNZ left its official cash rate (OCR) unchanged at 0.25%. This decision was in line with market expectations. The regulator also held its QE program at NZD 100 bln. The Monetary Policy Committee said it would maintain its current stimulatory monetary settings until it was confident that its inflation and employment targets are achieved.

Today, the kiwi is driving the whole FX market, while other currencies are reluctant to appreciate against the USD due to rising UST yields. Right now, the fixed income market is the key factor moving the FX market. If yields go up to 1.59%, EURUSD will fall to 1.2225, with aggressive selling to be expected at 1.2200 (4).

That said, euro weakness could be offset by positive pandemic news. A number of areas in Europe and the US are registering fewer infections and deaths, prompting governments to lift restrictions.

The market outlook is ambiguous and players are advised to focus on EURGBP cross pair dynamics. If the cross continues to rally, the euro will strengthen against the greenback. And if yields start to decrease, the 10Y-note will retrace to yesterday's high. Today’s economic calendar is a blank slate, so upward and downward swings are possible.

Bottom line: the euro came under pressure in Asian trading from a decline in the EURNZD cross pair, as well as an uptick in Treasury bond yields. The kiwi rallied after the RBNZ meeting. On the one hand, the euro bulls are inclined to move up to 1.2295, but on the other hand, they are held back by a new uptrend in 10-year yields. The fixed income market is currently the key catalyst for the FX market. If yields go up to 1.59%, EURUSD will drop to 1.2225, with aggressive selling at 1.2200.

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