Euro Advances as Yield Spreads Stabilize and Dollar Weakens

Key Moments

EUR Gains in Broad-Based Dollar Retreat

The Euro (EUR) is trading stronger against the US Dollar (USD), rising 0.4% and ranking as a mid-performer among G10 currencies in a market backdrop characterized by widespread USD softness. According to Scotiabank Chief FX Strategists Shaun Osborne and Eric Theoret, the current move in EUR is unfolding against a generally weaker dollar tone across major currencies.

Support from Yield Spreads and ECB Commentary

EUR is drawing support from the behavior of Euro area-US yield spreads, which are showing signs of stabilizing after narrowing over the past week. This stabilization is helping to underwrite the Euro’s performance following recent pressure on the currency.

“Data releases have been limited to second-tier confidence data and comments from the ECB’s Muller have leaned neutral-hawkish speaking of higher rates over the next few years. Euro area-US yield spreads are showing signs of stabilization, offering the EUR some fundamental support following their recent narrowing over the past week.”

Correlation and Sentiment Indicators Improve

The strategists highlight that the relationship between the Euro and yield spreads has strengthened again:

“The EUR/spread correlation is recovering sharply, suggesting a return to fundamentally-driven movement. Risk reversals are also showing signs of stabilization, offering additional sentiment-related support following an equally erosive pullback. We remain medium-term EUR bulls targeting 1.18 by the end of Q1 and 1.22 by the end of 2026.”

The recovery in risk reversals is viewed as a constructive signal for market sentiment toward the common currency, complementing the improved correlation dynamics.

Technical Picture: Key Levels and Trading Range

On the technical front, the recent rebound in EUR has been described as a significant development, as it halted further downside momentum below a key moving average reference level:

“The EUR’s latest recovery is important, delivering a welcome bullish reversal to deny an extension of Friday’s close below the 50 day MA (1.1654) trend level. The 50 day MA is important, having offered alternating support and resistance over the past year. We see the local range as being defined by 1.1620 support and 1.18 resistance. We look to a near-term range bound between 1.1650 and 1.1750.”