EUR/USD: Limited downside potential over medium-term – MUFG
|Economists at MUFG Bank expect no further widening of the 10-year US yield spread over the 10-year German bund, which should cushion EUR/USD downside.
A strong CPI print could see 10-year yield quickly becoming more comfortable at levels over 4.00%
The 10-year yield is oscillating around the 4.00% level but has corrected lower from the recent high of 4.20% which technically is looking like another rejection by the market of levels over 4.00%. Of course, a strong CPI print could see the market quickly becoming more comfortable with consolidating at levels over 4.00%.
The spread over the 10-year German bund is currently at around 150 bps having been as narrow as close to 100 bps in April. The current spread is consistent with the level (150-175 bps) that prevailed in 2015-2016 when EUR/USD was around trading around 1.1000. Our forecasts assume there is no further widening from these levels favouring the US which should limit the downside for EUR/USD over the medium-term.
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