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Euro Forecast: EUR/USD Outlook Improves as German Bund Yields Rise

Euro Forecast: EUR/USD Outlook Improves as German Bund Yields Rise

Martin Essex, MSTA, Analyst

Fundamental Euro Forecast: Bullish

  • The European Central Bank’s Governing Council has clearly decided to stress to the markets that it’s watching rising Eurozone sovereign bond yields.
  • That’s a way of signaling that it doesn’t want them to rise too far too fast.
  • But last week they rose anyway and that’s positive for both EUR/USD and the major Euro cross rates such as EUR/GBP.
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Euro price outlook positive

Members of the European Central Bank’s Governing council, including President Christine Lagarde, Germany’s Isabel Schnabel and Chief Economist Philip Lane, were all stressing last week that they are closely watching Eurozone sovereign bond yields – code for warning the markets that they don’t want them to rise too far too fast.

Schnabel went even further, saying the ECB will fight any big increase in real (inflation-adjusted) interest rates as that could choke off the bloc’s economic recovery. The recovery appears to be lagging the US anyway, yet Eurozone sovereign bond yields still tracked US Treasury yields higher and that is positive for both EUR/USD and the major Eurozone cross rates such as EUR/GBP.

The increase in yields can be seen in the chart below of the 10-year German Bund yield, the benchmark for the Eurozone.

German 10-Year Bund Yield, Daily Timeframe (November 20, 2020 – February 25, 2021)

German 10Y Bund Daily Chart

Source: Investing.com(You can click on it for a larger image)

At the same time, the German yield curve is steepening, with yields above 20 years now above zero, and as the charts both above and below indicate the ECB is having little success in its attempts to keep borrowing costs down.

German Yield Curve (February 25, 2021)

German Yield Curve

Source: Investing.com

For EUR/USD, of course, much depends on what happens to the US Dollar. However, a further rise back to the 2021 high of 1.2349, touched on January 6, would be no surprise given the fundamental background.

EUR/USD Price Chart, Daily Timeframe (August 14, 2020 – February 25, 2021)

EUR/USD Daily Chart

Source: IG

Week ahead: Inflation in focus

Turning to the economic data, February inflation figures from Germany Monday and the Eurozone as a whole Tuesday will be the center of attention and any above-forecast increases would likely reinforce the view that Euro strength can be expected. German and Eurozone unemployment and retail sales figures are due too but are likely to have an impact on the Euro.

We look at currencies regularly in the DailyFX Trading Global Markets Decoded podcasts that you can find here on Apple or wherever you go for your podcasts

--- Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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