German/US 2-Year Note Spread Continues to Weigh on EURUSD



Yesterday's European core CPI (flash estimate) came in at 4.2% y/y, which is lower than the previous 4.5 y/y, registering as a two-year low. The spread between the German and US 2-year notes also declined by about 1.5% on the day.

The 2-year note is a good proxy for monetary policy, and the spread between the German and US 2-year notes has been declining since April 2023 (red arrow). One interpretation is that the decline shows that the ECB is less hawkish than the Federal Reserve.

The correlation coefficient between the 2-year spread and the EURUSD is a robust 81%. I.e., a positive relationship exits between the two series. As such it is not a surprise to see that the EURUSD has been declining since July 2023 (blue arrow), as the spread has been decreasing.

The European PMIs were also very weak and will be on the mind of policymakers, as the ECB wrestles with an inflation that is higher than its target, albeit with a weakening economy. Last week's Flash Manufacturing PMI for Europe was 43, with the Flash Services PMI at 47.8. A value below 50 suggests contraction. In contrast, the US PMIs were 50 and 50.9 respectively.

Later today, the FOMC statement will be released (6:00PM GMT), and a half hour after, Fed Chair Powell will give his press conference. If there is a hawkish tone to the messages, this will support the dollar, and apply further pressure to EURUSD.

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Hourly Chart

The hourly chart has been declining since the European inflation numbers were released (red trendline). The green 5-hour EMA is below the orange 10-hour EMA, putting the trend-following EMAs into bearish formation. Moreover, the momentum-based stochastic has dropped into its lower quintile and has maintained there (green rectangle). This suggests an underlying bearish momentum is present. The longer the stochastic maintains at current levels, the more pressure the EURUSD will be under.

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.

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