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EUR/USD: 10-year US-German yield spread hits 3-month high ahead of US CPI

  • EUR's recovery from 21-month lows reached last Thursday contradict the widening of the US-DE yield differential. 
  • A better-than-expected US CPI will likely push EUR back into the bearish territory below 1.12. 
  • EUR/USD's recovery from recent lows below 1.12 could be short-lived, as the yield differential is widening in the EUR-negative manner. 

The pair is currently trading at 1.1260, having hit a high of 1.1274 earlier today. The recovery from the low of 1.1176 seen on Thursday is likely a result of risk reset in equities and more importantly, contradicts the widening of the US-German bond yield differential.

The spread between the 10-year US and German (DE) government bond yields is currently seen at 259.2 basis points - the highest level since Dec. 18. Notably, the spread is up five basis points from the low of 254 basis points seen on Friday. So, EUR/USD's bounce from 21-month lows looks like a bear trap. 

The benchmark bond yield spread may widen further in the EUR-negative manner if the US consumer price index for February, scheduled for release at 12:30 GMT, betters estimate. 

Technically speaking, the move back above 1.12 has weakened the bearish case put forward by Thursday's close at 1.1193. With US-DE bond yield spread rising, the EUR is not out of the woods yet and could again close below 1.12 on strong US data.  

That would imply a downside break of the multi-month trading range of 1.12-1.15 and open the doors to 1.10.