EUR/USD Intermarket: At the mercy of US 2-yr yield

EUR/USD pair has been driven by the US-German 2-year bond yield spread since mid 2014. That was the time when speculation of ECB QE started hitting the wires, while the Fed began telegraphing the first rate hike.

ECB negative rates strategy nearing end game

Since then the ECB has initiated QE program and dived deep into the negative territory. Consequently, the two-year German yield is hovering at -0.62% today. Not only ECB, but other central banks pushed interest rates into negative as well.

However, things backfired and the central banks are now reconsidering the negative rate strategy. Undoing what has already been done is a difficult task, but odds are high that ECB and others may hold interest rates unchanged for a prolonged period of time.

This means, the EUR/USD pair is now largely at the mercy of the US 2-yr yield. Markets are having a tough time believing the Fed would hike rates. Failure on the part of the Fed risks sending 2-yr yield lower. That would result in narrowing of the spread in favor of the Euro.

Dropping US yields would push German yields lower as well, however, it is worth noting that US yields are likely to lead government bond yields higher/lower. Hence, EUR/USD is at the mercy of the action in the 2-yr treasury yield.