Narrowing of the 10-year EZ-US spread will be a supportive factor for EUR/USD – MUFG

The 10-year EU-US spread has narrowed. This should support the EUR/USD pair, in the view of economists at MUFG Bank.

Spread / FX link tends to correct following shocks

“The very sharp narrowing of the 10-year EZ-US spread will have an influence on FX – all else equal. Like long-term valuation – we should depend on this analysis for short-term direction, but over time if this 10-year spread narrowing is sustained, it will be a supportive factor for EUR/USD.” 

“The largest divergence in 10yr spread / FX direction came following the launch of the Euro in 1999 which coincided with remarkably strong fundamentals for the US with record FDI inflows to the US fuelled by the tech/productivity boom. Outside of that example, EUR/USD tends to mean revert based on data back to mid-1980’s.”