The Euro vs. US Dollar Battle Continues

EUR/USD Price, Chart, and Analysis

  • Two-year US Treasury yield nears 2.50%, 2s-10s invert again.
  • Euro Area headline inflation hits an all-time high.

The Euro continues to trade on either side of 1.1000 against the US dollar despite a further rise in short-dated US Treasury yields. Last Friday’s record high Euro Area headline inflation print for March of 7.5% is now prompting thoughts that the ECB may have to tighten monetary policy quicker than originally thought.

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The closely watched two-year US Treasury yield is closing in on 2.50%, a fresh three-year high, as expectations grow that the next two US interest rate hikes will be in increments of 50 basis points as the Fed seeks to quell rampant US inflation. The 2s-10s UST yield curve has inverted again – currently by 5 basis points – suggesting that the Fed is behind the curve fighting inflation and that the US economy may fall into recession in late 2023. A backdrop of higher UST yields continues to strengthen the US dollar and this is likely to remain the case in the weeks and months ahead.

The latest Euro Area inflation data, released last Friday, showed annual headline inflation in the area hitting a record high of 7.5%, driven by soaring fuel and natural gas prices. The core reading also rose to 3% from 2.7% in February. The European Central Bank (ECB) is now under pressure to react to this surge in price pressures and may look to signal that it will tighten monetary policy sooner rather than later to help squash inflation. Last year the Federal Reserve (Fed) remained steadfast that price pressures were transitory until data finally convinced them that this was not the case and the ECB should be cautious that they do not make the same mistake. Inflation is notoriously difficult to control once it becomes entrenched.

The daily EUR/USD chart shows the Euro continuing to battle against a strong US dollar with the pair trading on either side of 1.1000. A cluster of prior lows between 1.0945 and 1.0970 provide short-term support for the pair while initial resistance is seen at 1.1120.

EUR/USD Daily Price Chart – April 4, 2022

Retail trader data show62.86% of traders are net-long with the ratio of traders long to short at 1.69 to 1. The number of traders net-long is 0.78% higher than yesterday and 2.54% lower from last week, while the number of traders net-short is 2.06% higher than yesterday and 7.32% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/USD price trend may soon reverse higher despite the fact traders remain net-long.

What is your view on the EURO – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.

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