EUR/USD: yield differentials favor the US dollar

• The US-German (DE) two-year yield spread is rising in the EUR-negative manner.
• Markets are likely expecting a dovish bias.
• The International Monetary Fund (IMF) on Monday downgraded the global growth forecast, courtesy of softening demand across Europe.

The EUR/USD pair is currently trading at 1.1360 and risks falling to 1.13, courtesy of the dovish European Central Bank (ECB) expectations.

The spread between the US and German two-year bond yields rose to 320 basis points on Friday; the highest level since Dec. 21. The rising yield differential indicates the markets are likely expecting the European Central Bank (ECB) President Draghi to sound dovish at this week’s rate-setting meeting on Jan. 24.

Notably, the yield spread could rise further ahead of the ECB’s rate decision, as the IMF’s cut its forecast for the world economy for the second time in three months, citing softening demand across Europe. Add to that Brexit uncertainty and financial market instability and Draghi has little room to talk dovish.

The EUR, therefore, is likely to remain under pressure ahead of the ECB’s rate decision. The technicals are also biased bearish. For instance, the pair has found acceptance under the 50-day moving average (MA) support and the 5- and 10-day MAs are trending south.

EUR/USD Technical Levels