The 02-year spread continues to drive EURUSD



The 02-year yield is a good proxy for central bank monetary policy. This is because the short end of the curve adjusts quickly to changes in the cost of capital. As such, we can look at the spread between two regions' 02-year notes to get an idea on how the market views their respective monetary policies.

Spread vs. EURUSD


For example, consider the spread between the German 02-year note (as a proxy for the Eurozone) and the US 02-year note (top chart). Here, we see that a higher trough (HT) followed by a higher peak (HP) has charted. This implies that the spread is widening in favour of the German 02-year note. Our interpretation is that the market views the ECB as relatively more hawkish than the Federal Reserve.

This is a primary driver of the EURUSD pair (middle chart). The EURUSD has also charted a higher trough (HT) followed by a higher peak (HP). As such, it is also in uptrend. Not surprisingly, the correlation coefficient (bottom chart) is robust, with a 77% reading. I.e., there is a close correlation between the 02-year spread and the EURUSD.

Why Trade with FXCM

Commission free with fast, efficient execution.

We now focus on the higher trough, HT*. If we see more movement up in the spread, and the correlation coefficient holds, this should filter through to a higher EURUSD.

ECB Sintra Symposium

The ECB Symposium in Sintra kicks off today. We expect a general hawkish tone from participants. Regarding the Eurozone, the economic outlook is deteriorating. For example, yesterday's German ifo Business Climate reading deteriorated from 91.5 to 88.5, with 90.7 being the forecast. We have also seen generally weak manufacturing PMI readings out of the region, amongst other date points.

Nevertheless, central banks are primarily focusing on their price stability mandate with inflation clearly pushing policy. The ECB will hike in July and probably again in September.

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

${} / ${getInstrumentData.ticker} /

Exchange: ${}

${} ${getInstrumentData.divCcy} ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%) ${getInstrumentData.priceChange} (${getInstrumentData.percentChange}%)

${getInstrumentData.oneYearLow} 52/wk Range ${getInstrumentData.oneYearHigh}

Any opinions, news, research, analyses, prices, other information, or links to third-party sites contained on this website are provided on an "as-is" basis, as general market commentary and do not constitute investment advice. The market commentary has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is therefore not subject to any prohibition on dealing ahead of dissemination. Although this commentary is not produced by an independent source, FXCM takes all sufficient steps to eliminate or prevent any conflicts of interests arising out of the production and dissemination of this communication. The employees of FXCM commit to acting in the clients' best interests and represent their views without misleading, deceiving, or otherwise impairing the clients' ability to make informed investment decisions. For more information about the FXCM's internal organizational and administrative arrangements for the prevention of conflicts, please refer to the Firms' Managing Conflicts Policy. Please ensure that you read and understand our Full Disclaimer and Liability provision concerning the foregoing Information, which can be accessed here.

Past Performance: Past Performance is not an indicator of future results.

Spreads Widget: When static spreads are displayed, the figures reflect a time-stamped snapshot as of when the market closes. Spreads are variable and are subject to delay. Single Share prices are subject to a 15 minute delay. The spread figures are for informational purposes only. FXCM is not liable for errors, omissions or delays, or for actions relying on this information.