EURUSD: Risk Appetite Opens Higher

All major currencies closed the week lower against the US dollar. The largest decline was shown by the Australian dollar (-2.04%). Smaller losses were recorded by the Swiss franc (-1.42%), the Japanese yen (-1.04%), the Canadian dollar (-1.02%), the New Zealand dollar (-0.87%), sterling (-0.54 %) and euro (-0.37%).

The EURUSD pair traded to the downside on Friday, February 26, shedding 0.8% to 1.2070. On Thursday, the dollar locked in gains amid a rally in 10-year US Treasury yields (US10Y). On Friday, the dollar saw the price action rise as yields declined. After retracing to a weekly high, the 10-year yield fell 6.98% to 1.419%.

There is no stable correlation between US10Y and DXY. It can be either negative or positive. When the yield on government bonds exceeded the S&P 500 dividend yield, investors started to pull out of equities. This means that the correlation acts as a trigger for exiting positions in high-risk assets. Thus, FX market participants have drawn attention to the fact that the Fed underestimates growth in inflation and could move to tighten monetary policy earlier than expected.

On Friday, market participants brushed aside US10Y dynamics and recalibrated their positions before the end of the month.

Today’s macro agenda (GMT+3)

  • 11:15 to 12:30 manufacturing PMIs (February) in Spain, Italy, France, Germany, Eurozone, and UK
  • 16:00 Germany: CPI (February)
  • 16:30 Canada: current account (Q4)
  • 17:00 US: FOMC John Williams speech
  • 17:05 US: FOMC Lael Brainard speech  
  • 17:45 US: manufacturing PMI (February); 18:00 ISM manufacturing (February)
  • 19:10 EU: ECB president Christine Lagarde speech

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Current outlook

On Monday morning, major currencies have been trading in positive territory, except for the Japanese yen. Topping today’s FX leaderboard are the kiwi and the aussie (each up by an average 0.6%). The Australian currency headed north in response to the RBA’s policy action. The central bank has been aggressively buying up long-term Australian government bonds to keep yields in check.

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Disclaimer: Forecasts which are made in the review constitute the personal view of the author. Commentaries made do not constitute trade recommendations or guidance for working on financial ...

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