EUR/USD: hawkish Fed pushes US-DE yield spread to new multi-decade highs

• Fed reiterated its hawkish stance yesterday, pushing US-DE yield differentials higher.
• Technical charts reveal the recovery rally has ended.
• The EUR/USD may drop to 1.17 today.

The EUR/USD fell to an eight-day low of 1.1341 in Asia and could drop to 1.13 by NY close, courtesy of widening yield differentials.

The Fed kept interest rates unchanged yesterday and sounded optimistic as expected, confirming what markets already knew – a 25 basis point rate hike is coming in December.

Simply put, the monetary policy divergence between the Fed and the European Central Bank is set to widen further. As a result, the spread between the US 2-year treasury yield and its German counterpart could continue to climb new heights in the USD-positive manner, having hit a fresh multi-decade high of 358 basis points (bps) yesterday.

The technical charts are also echoing similar sentiments. For instance, the pair closed yesterday 1.1363, confirming a bearish doji reversal, meaning the recovery rally has likely ended and the bears have regained control.

The bear may further strengthen if the spot drops below the key support at 1.13 (August low and October low).

At press time, the EUR/USD pair is trading at 1.1343.

EUR/USD Technical Levels