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17 Jan 2018
Crumbling correlations: EUR/USD & US-DE 2-yr yield spread
- US-DE 2-yr yield spread at highest since 1999.
- EUR/USD rises despite the widening yield spread.
The Fed is expected to hike rates three times this year, while the ECB is seen raising rates next year. Hence, the 2-year US-German (DE) yield spread continues to widen in favor of the USD. As of writing, the spread stands at 259 basis points - the highest level since 1999.
More importantly, the spread has risen 56 basis points since early September. Initially, EUR/USD fell from 1.20 (Sep high) to 1.1550 (Nov low) in response to rising 2-year yield spread. However, the chart below shows the correlation broke down in December.
While the spread continues to rise, the US dollar no longer follows suit, i.e. EUR/USD regained bid tone in mid-November and moved to 3-year highs above 1.22 today.
