EUR/USD, EUR/JPY Eye Further Losses after Flag Breaks
- EUR/USD momentum outlines clear trend with daily 8-EMA.
Expect a quieter day on the fundamental side of things today, as the Veteran's Day holiday in the United States has bond markets closed, and thus, one of the biggest drivers of US Dollar strength in recent weeks - shifting interest rate differentials - on pause. In honor of SIFMA's recommended closure of US bond markets in observance of Veteran's Day, let's use the mid-week pause to examine recent yield shifts.
There are two ways to visualize recent shifts in market expectations. First, the Fed funds futures contract is now implying a 66% chance of a 25-bps rate hike in December:
Second, a look at shifts in the US Treasury yield curve structure over the past month highlights the change in rate expectations:
Over the past month, the belly of the yield curve - debt with duration of 3- to 7-years - has seen the biggest surge in nominal yields. As was the case during the "taper tantrum," a steepening belly of the yield curve (relative to the short-end or the long-end) has been a strong indicator of underlying US Dollar strength. While thos bodes well for the greenback, it may not bode well for other risk sensitive assets - USD/JPY may struggle to rally if equity markets slip. If USD/JPY struggles given EUR/USD bearish structure, this could feed into greater EUR/JPY losses over the coming weeks.
--- Written by Christopher Vecchio, Currency Strategist
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