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EUR/USD erases gains as Treasury yields continue to rise

  • EUR/USD trades flat after facing rejection at 1.2136 in Asia. 
  • The dollar recovers as US yields extend gains, equities drop. 
  • A continued rise in yields could trigger a stock market correction, lifting USD. 

EUR/USD has backed from session highs, with stocks trading weak amid a continued rise in Treasury yields. 

The pair is now trading near 1.2120, having reached a high of 1.2136 in Asia. 

The US 10-year yield has reached a fresh 12-month high of 1.39%, taking the year-to-date gain to 47 basis points. Elsewhere, major Asian equity market indices such as Japan’s Nikkei, Australia’s S&P/ASX 200, and the Shanghai Composite are trading flat to negative. 

The anti-risk US dollar could be benefitting from the rising treasury yields and the weak tone in stocks. 

On Friday, analysts told S&P Global Market Intelligence that a rapid move in Treasury yields could put brakes on the stock market rally. 

“We look at it not just from an absolute level of yields, but also the pace of increase,” Tom Essaye, founder of Sevens Report, wrote in a Feb. 17 note, according to S&P Global Market Intelligence, adding that, “if yields rise too quickly (and the 10 bps/day rallies continue) then the absolute level of yields won’t matter – the pace alone will cause a correction.”

According to Mitul Kotecha, Currency Strategist at Econometer.org, equity market investors will keep an eye on Treasury yields. 

Should equity markets come under pressure, the dollar will likely find haven demand – more so, as the USD short is still one of the most crowded trades in the financial markets. 

Aside from yields, the focus today will be on the forward-looking German IFO Expectations Index for February. A better-than-expected data is needed to lift the pair above the 50-day Simple Moving Average (SMA) hurdle, currently located at 1.2150. 

Technical levels

 

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