- Two-year US-German (DE) yield spread hits lowest since December 2017.
- EUR/USD could rise to the 200-day MA at 1.1372 in short-term.
- A break above the key average may remain elusive as markets may overpriced Fed rate cuts.
The narrowing US-German bond yield differentials indicate the path of least resistance for the EUR/USD pair is on the higher side.
The spread between the two-year US and German government bond yields fell to 250 basis points on Friday, the lowest level since December 2017.
The spread has dropped sharply from 300 basis points to 250 basis over the last weeks as markets pulled forward expectations of Fed rate cuts to July.
As a result, the EUR/USD pair could test the 200-day moving average (MA), currently located at 1.1372, in the next few days. The technicals are also painting a bullish picture with the daily chart reporting a double bottom breakout.
However, the rise to 200-day MA, if any, could be short-lived, as analysts at Goldman Sachs believe the markets hve run ahead of themselves in pricing aggressive rate cuts and the central bank will likely stand pat for the rest of the year.
As a result, the yield differential may recover somewhat in the USD-positive manner, making it hard for the bulls to force a convincing break above the 200-day MA.
The currency pair is currently trading at 1.1315, having hit a high of 1.1348 on Friday. The Eurozone data docket is light today with just Sentix Investor Confidence (Jun) scheduled for release at 08:30 GMT.
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