The 10-year Treasury-Bund yields spread is at its narrowest since 2016
The erosion in yields is looking to be a bit painful for the dollar at the moment as we see 10-year Treasury yields track under 1% (!) after the Fed rate cut yesterday.
Instead of boosting confidence in the market, investors are actually pricing in more action by the Fed with Fed funds futures just about expecting another 50 bps rate cut at the central bank's 18 March meeting in two weeks' time.
In my view, this is very much the market saying that it can keep bullying the Fed into pushing rates lower and getting away with it. But for the dollar, further deterioration in yields has basically seen its status as the "cleanest shirt among a dirty pile" fade away.
Going back to the really simple basics, investors are all about chasing yields. With the ECB feeling incapacitated to act and the market still looking to bully the Fed into more rate cuts, the Treasury-Bund yields spread has tightened sharply.
And this will add a reason for the euro to keep the pressure on the dollar in pushing EUR/USD higher during this period. Currently, there is the key trendline resistance at 1.1180 and the 1.1200 level is keeping the upside momentum at bay:
However, if price threatens a break above that and the January high of 1.1239, there is little in the way of a bigger move towards 1.1400 next.
In the bigger picture though, it is still all about the economic fallout from the virus outbreak.
If the virus outbreak continues to threaten the euro area economy more profoundly and the ECB and governments are too late or too stubborn to react, then the euro currency looks set for a significant fall on an even more depressed economic backdrop.
That is the key risk for the euro currency once the market looks past the yields focus now.
