- EUR/USD has bounced from fresh annual lows under 1.1520 to trade flat on the day and week above 1.1550.
- The US dollar has been weakening in recent trade as US bonds lead to a further decline in global yields.
EUR/USD has seen a surprising reversal after printing fresh annual lows under 1.1520 earlier in the session in wake of the stronger than expected US labour market report for October. The pair is now trading back to the north of the 1.1550 level and back to trading flat on both the day and week. The most recent move is dollar-driven, with the buck losing ground versus all of its major G10 counterparts. The US dollar has slid down the G10 rankings in recent trade and now sits around the middle of the performance table, having prior to the US data been one of the better performing G10 currencies.
US bonds lead global yield drop
Profit-taking with the currency pair at year-to-date extremes may be one reason for the bounce. More likely is that FX markets are taking their cue from some odd moves being seen in global bond markets. Global bond yields continue to slide, though are on Friday being driven in the US; US 2-year yields are down about 3bps to back under 0.40%, while 10-year yields currently trade lower by about 7bps and have fallen to their lowest since late September around 1.45%. Meanwhile, European yields are also falling, though to a slightly lesser degree, with German 2-year yields down about 2bps to -0.74% and German 10-year yields down about 6bps to around -0.28%. US/European yield differentials have thus seen a very modest closing, supporting EUR/USD.
It is somewhat perplexing that the reaction in global markets to a stronger than expected US labour market report would be for yields to fall. Typically, the opposite reaction would be expected as markets price in stronger economic growth, raise their expectations for inflation and, thus, raise their expectations for higher interest rates to counter said inflation. Technical buying, particularly for the US 10-year, might be playing a role. The 1.51% level was a key level for the US 10-year yields, below which there may well have been some stop losses, which could explain the acceleration in the drop once this level was broken.
It seems likely that as bond investors have time to mull over the implications for economic growth, inflation and Fed policy of the latest jobs report, they may realise that bonds at these prices are not particularly attractive (i.e. yields are too low). US Consumer Price Inflation data is also set for release next week and, if the headline number remains elevated above 5.0%, this may serve as a reminder that the narrative being pushed by many central banks across the globe that inflation is “transitory” is coming under increasing pressure.