Economists at MUFG Bank analyze the two-year government bond spread between US and EU and discuss its implications for the EUR/USD pair.

Month-end FX flows today could spark some unpredictable moves

“We remain unconvinced that the ECB will have to tighten by a further 50 bps but expectations continue to grind higher with the 2yr government bond spread more indicative of EUR/USD trading up closer to 1.1500. But with the market still priced for about 50 bps of easing from the Fed by year-end, that spread looks set to continuing supporting EUR/USD for now. We remain wary over that spread dynamic remaining so compelling which could prompt a correction in EUR/USD – next week’s US data may be the catalyst for that if the data remains resilient.”

“Month-end (quarter-end and FY-end for Japan) FX flows today could also spark some unpredictable moves that could alter the complexion of the market ahead of the key data from the US next week.”