EURUSD Driven By Interest Rate Differential

• Since the start of the year, the 10Y Euro-US interest rate differential has been one of the major factors influencing the EURUSD exchange rate.
• While the US 10Y yield has been consolidating by 20bps since its high of 1.77% reached in the end of March, the German 10Y yield continues to retrace higher up 30bps since February to -23bps.
• The chart below shows that the rise in the 10Y IR differential since the start of April has pushed EURUSD higher by over 3 figures above the 1.20 level.

Source: Bloomberg/MNI

• On one hand, a significant proportion of market participants are convinced that the sharp divergence in growth expectations between the US and the Rest of the World (US will outperform its peers) will continue to favor the US Dollar against most of the major crosses, especially the Euro.
• On the other hand, some investors are preparing for further yield curve steepening in the Euro area as the reflation trade continues, and therefore are pricing in a higher EURUSD exchange rate in the months to come.
• The chart below shows that the 1.17 low reached on March 31 also corresponds to the 38.2% Fibo retracement of the 1.0640 - 1.2350 range (2020/2021 low high) and the new ST support on the pair currently stands at 1.1950 (50D SMA, 200D SMA and 23.6% Fibo).
• On the topside, first resistance stands at 1.2150, followed by 1.2350.

Source: Bloomberg/MNI