The economists of MUFG Bank discuss the US/EU two-year government bond spread and discuss its implications for EUR/USD.
End-of-month currency flows could trigger some unpredictable moves today
“We remain unconvinced that the ECB will need to tighten by an additional 50 basis points, but expectations continue to rise, and the two-year government bond spread is higher. indicative that the EUR/USD pair will approach 1.1500. However, with the market still expecting a Fed easing of around 50 basis points by the end of the year, it looks like the spread will continue to support EUR/USD for the time being. We remain wary that spread dynamics will remain so compelling, which could trigger a correction in EUR/USD; US data next week could be the catalyst for that if the data remains resilient.”
“End-of-month (end-of-quarter and end-of-year for Japan) currency flows could also trigger unpredictable moves that could alter the complexion of the market ahead of next week’s key US data.”
Source: Fx Street
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