As the German and UK 10 year yields continue to gain relative to their US counterparts, it’s important to highlight the fact that EUR and GBP are more positively correlated to their respective bond yields than is USD to the yields  of the 10-year note.

Upcoming US June consumer confidence figures at 14:00 GMT (exp 51 from 52.9) will be key in preserving the current rally in global equities following the 10-point jump in June. A sub-50 figure would work to the benefit of EUR and GBP as the cap in US bond yields works to the relative advantage of non USD FX.

UK and German bond yields extend their run-up based on data strength, rather than fiscal concerns, further raising the question of growth/yield differentials in FX markets.

As the German and UK 10 year yields continue to gain relative to their US counterparts, it’s important to highlight the fact that EUR and GBP are more positively correlated to their respective bond yields than is USD to the yields  of the 10-year note.

The correlation of the past 12 months between EURUSD and 10 year yields stands at 0.93 since May, while the correlation between GBPUSD and 10 year gilt yields stands at a much weaker 0.45. Nonetheless, both of those correlations remain far greater than the negative correlation of -0.62 between the USD index and the US 10-year yields.

Implications: These dynamics among currencies and bond yields imply more USD declines to come in the event of continued upside surprises in Eurozone and UK economic data (macro data or corporate earnings).

Just as Friday’s IFO survey from German; strong UK Q2 GDP and today’s CBI survey from the UK were among the latest macro data moving FX, Eurozone corporate earnings will draw more  attention in FX.

EURUSD’s break of $1.30 rests on the shrinking German-US 10-year yield spread, which hit a fresh 8-month low of -23 bps, EURUSD faces interim resistance at $1.3085-90, followed by more important $1.3120-30s, which is the 38% retracement of the 1.5156-1.1867 decline and the projected target according to the reverse Head & shoulder formation.

USDJPY awakes on the yields bounce as is the case for all yen pairs, eyeing 88.05 trendline line from the June high, which is a viable target ahead of Friday’s GDP figures. Subsequent resistance seen standing at 89.10

Ashraf Laidi

CMC Markets Chief Market Strategist