Euro/US Dollar interest rate forecasts have remained bullish for the pair as the spread has increased to +22 from +11, despite Euro interest rate expectations slipping to +90 from +91. The outlook for Fed tightening has decreased to 68 bps from 80 bps, as Fed Chairman Ben Bernanke continues to preach that interest rates will remain low for the foreseeable future. The yield spread has also widened to 0.91 from 0.86 justifying the pair gains over the past month.
However, the EUR/USD’s correlation to risk remains the main driver of price action and sharp pullback in equity markets would overshadow any increase in the interest rate spread. The ECB like the Fed has deemed “rates appropriate” and hasn’t shown any sign of changes their stance over the near-term. Therefore, traders should take their cue from risk trends and with current valuations outpacing underlining fundamentals downside risks are increasing for both stocks and the pair.
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