EUR / USD bounces back from yearly lows towards 1,550 as falling yields weaken the dollar

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  • EUR / USD has bounced from new yearly lows below 1.1520 trading lateralized on the day and for the week above 1.1550.
  • The US dollar has weakened in recent trading as US bonds trigger a further drop in global yields.

The EUR/USD has seen a surprising reversal after posting fresh yearly lows below 1.1520 early in the session on the back of the stronger-than-expected US labor market report for October. The pair is now trading above 1.1550 and has returned to sideways trading on both the day and the week. The most recent move is driven by the dollar, which is currently losing ground to all of its major G10 counterparts. The US dollar has moved down the G10 rankings in recent trading and is now in the middle of the performance chart, having been one of the best performing G10 currencies prior to US data.

US bonds lead global yield decline

Profit taking may be one of the reasons for the rebound. Currency markets are more likely to follow suit from some strange moves seen in global bond markets. Global bond yields continue to decline, particularly in the US 2-year yields in the US have dropped by around 3bp to once again below 0.40%, while 10-year yields are currently trading on the downside losing around 7 bp and they have fallen to their lowest level since the end of September around 1.45%. Meanwhile, European yields are also falling, albeit to a slightly lesser extent, with German 2-year yields losing around 2bp at -0.74% and German 10-year yields falling around 6bp to around -0.28 %. Therefore, the US / European yield spreads have seen a very modest close, supporting the EUR / USD.

It is somewhat puzzling that the reaction in global markets to a stronger than expected US labor market report is for yields to fall. Generally, the opposite reaction would be expected, as markets value stronger economic growth, raise their inflation expectations, and therefore raise their expectations of higher interest rates to counter such inflation. Technical buying, particularly for US 10-year yields, could be playing a role.

It seems likely that since bond investors have time to reflect on the implications for economic growth, inflation, and Fed policy of the latest employment report, they may find that bonds at these prices are not particularly attractive. (that is, the returns are too low). US consumer price inflation data will also be released next week, and if the main number remains elevated above 5.0%, this may serve as a reminder that the narrative driven by many central banks across the world that inflation is “transitory” is under increasing pressure.

Technical levels


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