EUR/USD looks on track to test the 1.0400 support level, economists at ING report.
Back-end yield premium weighing on the Euro
The 10 bps tightening in the EUR/USD 2-year swap rate differential on Friday was completely erased on Monday, with the spread once again at a -120 bps level. Such a wide gap was observed in two other periods in 2023 – at the very beginning of January and throughout February and March. Interestingly, EUR/USD never traded below 1.0500 in those periods, a testament to the back-end US-yields premium currently adding pressure on the pair.
Latest CFTC figures on speculative positioning suggest EUR/USD still had some residual net-longs (+14% of open interest) to be unwound, and the ever-deteriorating rate gap with the Dollar means that 1.0400 may well be tested this week. Swings in the volatile bond market will likely determine when that can happen.