EUR/USD needs to close above 1.1284, US-German yield spread largely unchanged after Draghi speech

Don’t be in a hurry to bet on a big move higher in the EUR/USD pair. The major is yet to chew through critical resistance around 1.1284. Take a look at the weekly chart – it shows multiple failures around 1.1284 – which is 161.8% Fib extension level.

Draghi says reflation forces are at play…

At the ECB Forum on Central Banking in Sintra, President Draghi said –

  • “Monetary policy is working to build up reflationary pressures, but this process is being slowed by a combination of external price shocks, more slack in the labour market and a changing relationship between slack and inflation”
  • “The threat of deflation is gone and reflationary forces are at play”
  • “With reflationary dynamics slowly taking hold, we now need to ensure that overall financing conditions continue to support that reflationary process, until they are more durable and self-sustaining”

EUR bulls are certainly cheering Draghi’s comments. EUR/USD rallied from 1.1190 to 1.1280 and is up full one figure compared to the daily low of 1.1172. Draghi’s ‘reflation’ comment is certainly encouraging and is enough to boost speculation that the QE taper could happen sooner than expected.

However, US-German yield spread is largely unchanged

US-German 2-year yield spread is largely stagnant around 195 basis points. The 10-year yield spread has narrowed only slightly to 186 basis points from 183 basis points. The lackluster reaction in the yield spread means the bond traders are either not buying Draghi’s comments or they are expecting Yellen (speech due later today) to boost the hike expectations.

So it is advisable to wait for at least a technical breakout – a convincing move above 1.1284 levels before joining the EUR party. Expect a sharp pull back if Yellen talks hawkish…

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