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- The Dovish Fed has narrowed the yield spreads in favor of the common currency, causing the EUR / USD to record highs of several weeks near 1.1440.
- Markets may have taken into account the pause in the Fed's rate hike over the last three months. The USD could therefore make a return on the trade "buy the fact".
The EUR / USD jumped to 1.1440 on Wednesday, its highest level since Feb. 4, as the Fed 's accommodating tone drove cash yields to a new low for the year.
The gap between US and German two-year government bond yields has fallen to 293 basis points, its lowest level since April 2018. In addition, delta risk reversals at 25 months have reached a three-month high at -0.10, bearish bias sign. (A reading above zero indicates a bullish bias).
Thus, the path of least resistance seems to be on the upper side. Validate this argument is the bullish closing of the pair above the trend line connecting the 10th and 31st January highs.
That being said, the markets insist that the Fed attack rates increases since early December. In simple terms, the pause reported by the Fed yesterday may have been taken into account. After all, the two-year yield gap is currently down more than 60 basis points from its peak of 358 basis points in early November.
Therefore, the greenback could regain its calm on the trade "buy the fact", pushing the EUR / USD back to the rising 5-day MA, currently at 1.1370.
At the time of writing, the spot is trading at 1.1423.
Technical levels
Resistance: 1.1488 (previous day's high), 1.1490 (200-day moving average), 1.1514 (Jan. 31 high)
Support: 1.1369 (5-day moving average), 1.1355 (50-day moving average), 1.1315 (200-hour moving average)
Two-year performance gap between Germany and the United States
Risk reversal 25 delta over a month
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