- EUR/USD has bounced from new yearly lows below 1.1520 trading sideways on the day and for the week, above 1.1550.
- The US dollar has weakened in recent trading as US bonds trigger a further drop in global yields.
EUR/USD has seen a surprise reversal after making new yearly lows below 1.1520 earlier in the session on the back of the stronger-than-expected U.S. labor market report for October.
MetaNews.
The pair is now trading over 1.1550 and has been trading sideways for the past week and day. The dollar, which is now losing ground versus all of its main G10 peers, is driving the most recent move.
In recent trading, the US dollar has dropped in the G10 rankings and currently lies in the center of the performance table. Despite being one of the best performing G10 currencies prior to the US data.
U.S. bonds lead global yield decline
One of the causes for the rebound could be profit-taking. Currency markets are more inclined to follow the lead of some unusual bond market movements.
Bond rates around the world are continuing to fall, particularly in the United States. 2-year rates have dropped around 3 basis points to below 0.40 percent. While 10-year yields have dropped nearly 7 basis points to roughly 1.45 percent, their lowest level since late September.
European yields are also falling
Meanwhile, European yields are decreasing as well, albeit to a lesser extent, with German 2-year yields down 2 basis points at -0.74 percent and German 10-year yields down 6 basis points at -0.28 percent. As a result, yield spreads between the US and Europe have narrowed significantly, boosting the EUR/USD.
The reaction of global markets to a stronger-than-expected US labor market report is to lower yields, which is quite perplexing.
Markets value better economic growth, which raises inflation expectations, and so raises expectations for higher interest rates to combat such inflation. It’s possible that technical buying, notably in US 10-year yields, is having a role.
Bond investors are likely to understand that bonds at these levels are not very appealing as they consider the implications of the recent jobs report for economic growth, inflation, and Fed policy (i.e., yields are too low).
Next week, the US consumer price inflation data will be announced, and if the headline number remains over 5.0 percent, it may serve as a reminder that the “transitory” inflation narrative promoted by many central banks around the world is under increasing strain.