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EUR/USD Rally Stalls as Euro-Zone Bond Yields Fall

EUR/USD Rally Stalls as Euro-Zone Bond Yields Fall

Nick Cawley, Strategist

Talking Points

- Euro-Zone bond yields fall, dragging down the single currency from its post-NFP bounce.

- The Dutch general election on Wednesday is prompting a risk-off tone, while talk intensifies that the UK may trigger Article 50 on Tuesday.

- See the DailyFX Economic Calendar and see what live coverage for key event risk impacting FX markets is scheduled for next week on the DailyFX Webinar Calendar.

Upcoming event risk in Europe is channeling investors back into safe-haven government bonds, pushing yields lower and taking the shine off the recent rally in EUR. The risk-off move has also pushed gold back above the $1200/oz. level despite a Fed interest rate hike being fully priced-in this week.

Wednesday’s Dutch election is the first gauge in 2017 of the recent swell of right-wing support in Europe, coming less than a year after the UK voted to leave the EU in late-June 2016. The anti-immigration Party for Freedom, led by Geert Wilders, is riding high in the polls, and the populist leader has pledged to take the Netherlands out of Europe if his party comes to power.

And the recent political spat with Turkey – the Dutch government barred Turkish ministers from speaking at a pro-Erdogan rally in Rotterdam over the weekend – may have boosted the far right’s appeal ahead of the election. While Wilders may win the election, it is unlikely however that he will get to rule the country as other parties have said they will not join in a coalition with Wilders to get the Freedom party over the line.

While the Dutch election will be closely watched for any surge in the populist vote ahead of voting in the first round of the French election on April 23, talk that the UK government may trigger Article 50 this week is also increasing political risk and putting downward pressure on the single currency. The House of Lords is expected to reject any amendments to the Brexit bill, and if the bill then passes through the House of Commons, seen as likely, UK Theresa May could trigger Article 50 as early as late Tuesday or Wednesday this week.

In the German government bond market, the safe-haven fixed income market of choice in Europe, bond prices rose, forcing yields lower, as buyers stepped in. The yield on the German 10-year benchmark fell 5bps to 0.445%, narrowing the rate differential with the 10-year US Treasury, and forcing the single currency lower. Gold also benefitted from the risk-off move with the precious metal adding around $9/oz. despite expectations of a 0.25% US rate increase at this Wednesday’s FOMC meeting. Higher US rates, and a stronger USD - a sign of economic strength - normally push the price of gold lower as its safe-haven appeal erodes.

The recent rally in EURUSD came to a halt in early European trading with the pair falling from an early high of 1.07147 to a current level around 1.06685.

Chart: EURUSD 30-Minute Timeframe (March 10 – March 13, 2017)

EUR/USD Rally Stalls as Euro-Zone Bond Yields Fall

Chart by IG

--- Written by Nick Cawley, Analyst

To contact Nick, email him at Nicholas.cawley@ig.com

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