EUR: Persistent Pressure from Back-End Yield Premium

EUR: Back-end yield premium weighing on the euro

The 10bp tightening in the EUR/USD 2-year swap rate differential on Friday was completely erased on Monday, with the spread once again at a -120bp 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. The Bund-UST 10-year spread has widened by nearly 60bp since mid-June, now at a -177bp low as seen in November 2022.

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. As discussed above, swings in the volatile bond market will likely determine when that can happen. In a recent note, we estimated EUR/USD would fall to the 1.02 area should 10-year yields hit 5.0%.

Domestically, the eurozone data calendar is empty today, but we’ll hear from a few European Central Bank speakers, including Philip Lane and Francois Villeroy.