U.S. Treasury and German Bond yield spreads close to two-year maximum The euro rally is being tested

The yield premium of US Government bonds relative to German Government bonds has widened, and the strong trend of the euro this year may pause slightly.

The two-year U.S. and German yield spreads are close to their biggest level since February 2020, with shocking U.S. inflation data a day ago leading traders to bet on the Fed to raise rates up to seven times this year.

ECB President Christine Lagarde's attitude has been a headwind of upward resistance to eurozone bond yields. While officials no longer rule out the possibility of a rate hike this year, Lagarde warned the other day that premature action by the central bank could derail the recovery.

Simon Harvey, head of foreign exchange analysis at Monex Europe, said the yield spread between U.S. and German bonds could limit the euro's rally in the first half of the year. The EURUSD has previously rebounded from a 1.5-year low set in January as the ECB took a hawkish stance when it announced its policy decision on February 3.

Less support

The U.S. dollar briefly moved higher after the release of higher-than-expected CPI data on Thursday. But U.S. bank interest rate strategists such as Ralf Preusser said in a research report on Friday that the expected cycle of rate hikes is becoming less and less supportive of the dollar, and the dollar may reach the top of the cycle, while the euro sentiment appears to be rebounding.

Traders scale back dollar bets as the prospect of fed rate hikes jeopardizes U.S. economic growth

According to the 1-year risk reversal indicator, EUR/USD sentiment fell to its lowest point since May. Strategists expect the euro to rebound to $1.15 by the end of the year.

Peter Chatwell, head of multi-asset strategy at Mizuho International, said the widening spread between the two-year US and German treasury yields would push the euro lower against the dollar as it entered the summer. However, "as policy uncertainty diminishes and fundamental differences surface, many of these trends will reverse in the second half of the year."

This article originated from the financial world