EUR/USD: Focus on yield differentials

• The 10-year US-German (DE) yield spread currently stands at 7-week lows.
• The spread could drop further in the EUR positive manner if the German factory orders beat estimates and US ISM non-manufacturing shows slowdown in inflation.

The EUR/USD pair is trading in a sideways manner around 1.1340 for the fourth day straight despite the EUR-positive developments in the bond markets.

To start with, the spread between the two-year US Treasury yield and its German counterpart is down at least 16 basis points from the high of 358 basis points seen a month ago. Further, the benchmark yield spread is seen at 268 basis points – the lowest level early October.

Also, Italy-German 10-year yield spread has narrowed to 279 basis points – the lowest level since Oct. 4.

So far, however, that has not put a bid under the EUR, possibly due to fears of economic recession stemming from the Treasury yield curve inversion.

The EUR, however, may pick up a strong bid if German factory orders, scheduled for release at 07:00 GMT, blows past expectations. Meanwhile, the US dollar could take a beating if the US ISM non-manufacturing index shows a weakening of price pressures. Moreover, that could hasten the curve inversion between the two-year and 10-year yield.

Both treasury yields and the US dollar could also come under pressure if  Fed’s Powell puts more emphasis on the rising risks to the US economy, forcing markets to price in a rate pause in 2019. The central bank chief is scheduled to speak today.

Technically speaking,  EUR/USD is trapped in a symmetrical triangle pattern and an extended move is likely to happen in the direction in which the range is eventually broken.

EUR/USD Technical Levels