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  • EUR/USD draws bids despite rising US-German bond yield spread. 
  • Risk sentiment is driving the action in the forex markets. 
  • Speech by ECB’s Lagarde may put the focus on yield differentials. 

EUR/USD is gaining altitude despite the widening of the US-German 10-year bond yield spread in the USD-positive manner. 

The currency pair is currently trading near 1.1790, having begun the week near 1.1710.

On Monday, the spread between the US and German 10-year bond yields increased by ten basis points to 1.30, the highest level since March 20. 

Even so, the pair jumped by over 0.4%. Markets offered the safe-haven US dollar as reports of President Trump’s recovery from coronavirus boosted risk appetite in the global equity markets.

Clearly, risk sentiment rather than bond yield differential is currently driving the action in the forex markets.  

The situation, however, may change if the US-German yield spread continues to rise. That could happen as pressure on the European Central Bank to provide more easing is mounting with the declining inflation trend. The cost of living in the common currency area recently fell into negative territory. 

The ECB President Christine Lagarde may drop hints of additional easing via her speech, due at 13:00 GMT on Tuesday, putting pressure on the single currency. 

Apart from Lagarde’s speech, the Federal Reserve chairman Jerome Powell’s speech at 14:40 could also influence the US-German yield spread and EUR/USD. 

Technical levels

Resistance: 1.1802 (50-day simple moving average), 1.1918 (Sept. 10 high)

Support: 1.1748 (5-day simple moving average), 1.17 (psychological support)