EUR/USD Intermarket: Franco-German yield spread is in the driver’s seat

The rally in the EUR/USD pair from the low of 1.0341 (Jan 3 low) topped out at 1.0829 (Feb 2 high). Since then the currency pair has been losing height and now trades at 1.0540 levels.

During the same time period, the gap between French and German 10-year government bond yield rose from 0.652 to 0.787. Moreover, the French 10-year yield remained more or less steady around 1.085%, while German 10-year dipped from 0.437% on February 1 to current level of 0.301%.

This clearly points to rise in the safe haven demand for the German bunds on account of the political uncertainty in France. Greek crisis redux is also adding to the bearish pressure on the German yields.

Fed minutes could play second fiddle to European politics

Politics could easily overshadow Fed minutes, unless there is a discussion on the downsizing of the Fed’s balance sheet size. Franco-German 10-year yield spread could continue to guide the pair in the short-term.