EUR/USD: Two-year US-DE yield spread hits fresh multi-decade high, focus on Fed

• The relentless widening of the US-German (DE) yield spread indicates that markets have priced-in Fed's gradual path of tightening.
• The EUR/USD could catch a bid wave if the Fed sounds dovish.

The EUR/USD is currently sidelined around 1.1765 and could pick up a strong bid if the Fed reaffirms gradual rate hike path.

Indeed, the central bank is set to raise rates by 25 basis points today, however, markets seem to have priced-in two more rate increases this year.

This is evident from the relentless rise in the US-German yield differential. For instance, the two-year yield spread, which is more sensitive to interest rate expectations, has gone up by 84 points this year. Further, it has increased by 16 basis points in the last four weeks.

Clearly, the gradual rate hike path is baked in, hence the rate hike is unlikely to push the EUR/USD lower. The USD may rise across the board only if the Fed signals low tolerance for above-target inflation and willingness to push rates above the neutral level of 2.87 percent.  

EUR/USD Technical Levels

Resistance: 1.1815 (weekly high), 1.1852 (June 14 high), 1.1945 (200-day moving average)

Support: 1.1713 (ascending 10-day moving average), 1.1658 (100-day moving average), 1.16 (psychological level)