Analysis and Opinion »

Euro Retraces as Yield Differential Left Behind

Finances
Share on StockTwits
Published on
www.finances.com
Euro Retraces as Yield Differential Left Behind

The Euro broke out on Friday moving to its highest levels in December only to fall back to earth on Monday. The yield differential in the 2-year space, failed to move higher with the spot price, which helped traders push back the European currency below former resistance levels.

The move in the European currency comes despite comments from central bank president Draghi that should be positive for the Euro. Draghi stated that there is no pressing need for more rate cuts. Mario Draghi sees no immediate need to cut the bank’s main interest rate further. While the eurozone crisis isn’t over, Draghi told Germany’s Der Spiegel, “there are many encouraging signs.” These include economic recovery in some countries, especially Germany, lower trade imbalances and falling budget deficits. Draghi’s comments come after the ECB reduced rates by a quarter of a point to a record low of 0.25% last month.

chart-euro-retraces-as-yield-differential-left-behind1.png

The 2-year yield differential which is the driving force behind the movements of the forward rate, remains in the US’s favor printing near 20 basis points, which means investors will still need to pay away interest to hold on to long term EURUSD positions. The yield differential is generally highly correlated to the spot price of a currency pair and will move in tandem to the movements of the spot price.

chart-euro-retraces-as-yield-differential-left-behind2.png

The EURUSD currency pair fell back into a range which was formerly capped by a downward sloping trend line that comes in near 1.38. Support on the currency pair is seen near the 10-day moving average at 1.37. Momentum is robust with the MACD (moving average convergence divergence) index generating a buy signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The RSI moved higher with price action printing near 61, which is the upper end of the neutral range.

Share on StockTwits