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  • EUR/USD dropped another 0.5% on Monday to below 1.1850 and is now down 2.0% in the last four days.
  • The US dollar was dominant in the G10 on Monday amid rising US bond yields.

EUR/USD fell for a fourth consecutive session on Monday, dropping from close to the 1.1920 mark to fresh four-month lows under the 1.1850 mark in the final hours of trade prior to the 22:00GMT FX close. The pair closed the day 0.5% or about 60 pips lower and is now down 2.0% since last Wednesday. Bears will have their sights firmly set on the 200-day moving average, which currently sits at 1.1814.

Dollar dominates

The US dollar was the dominant force in FX markets on Monday. Aside from GBP and CAD, which (strangely) managed to hold up pretty well, most of the dollar’s G10 peers fell to the pale, including the euro.

There were a few Eurozone fundamental developments of note (weak January Industrial Production numbers out of Germany and Spain, a solid March Eurozone Sentix Index figure and another surprise drop in weekly ECB PEPP purchases) but all playing second fiddle to USD dynamics. The buck instead seemed to take its cue primarily from higher US bond yields, particularly in the treasury curve’s belly. For reference; 5-year yields were up over 7bps to above 0.85%, 7-year yields were up over 6bps to nearly 1.30% and 10-year yields rose nearly 5bps to above 1.60% on Monday.

Market commentators largely attributed the rise in yields to the passage of US President Joe Biden’s $1.9T “rescue” package over the weekend. Where there is more disagreement is over whether yields are rising as a result of inflation/”over-heating” fears as a result of more stimulus being on the way, or over-optimism about how more stimulus is going to boost the long-term economic outlook. Either way, it seems to bode well for the dollar; if it is the former, that means tighter Fed policy. If it is the latter, that means a combination of even greater US economic outperformance than might already be priced in and tighter Fed policy. Or, at least, that is how markets seem to be seeing things right now.

Looking ahead, the key drivers this week for the US dollar include Wednesday’s Consumer Price Inflation data release for February and 10-year government bond auction. If the former is stronger than expected and the latter shows poorer than expected demand for US government debt, this would provide fresh impetus to the recent move higher in bond yields and would likely be USD bullish. Meanwhile, US Weekly Jobless Claims on Thursday and Producer Price Inflation and Michigan Consumer Sentiment on Friday will both also be in the spotlight.