Focus of the day:
“The left-hand chart shows EUR/USD against the 10-year rate differential that it has been tracking. That’s a change from the long-term correlations, which show that 2-year differentials are more important. Meanwhile, risk sentiment and volatility now correlate positive with euro strength so this is a currency pair in a state of flux. However, yield differentials are moving in the euro’s favour and may take us back to 1.16.
The second chart shows a cute relationship between EUR/USD and the front end of the Euro curve. It’s there as a warning. Both a stronger euro and a dovish Fed add to pressure for further ECB easing. Could we see a further cut in rates if EUR/USD gets much higher?
That said, if the EUR/USD outlook depends more on the ECB than the Fed, the potential downside to EUR/USD is decreasing. The ECB just doesn’t have that much room to drive rates down.”