EUR/USD stabilises as Eurozone yields jump, though remains stuck below 1.0800 on Fed/ECB policy divergence

• EUR/USD is trading flat on Tuesday as Eurozone yields play catch-up to recent upside in their US counterparts.
• But the pair remains unable to reclaim the 1.0800 level and bears continue to eye a retest of recent lows.
• Meanwhile, FX strategists continue to cite Fed/ECB policy divergence and geopolitics as weighing on the pair’s near-term prospects.

A comparatively large jump in Eurozone bond yields versus their US counterparts, which are playing catch up given European market closures on Monday, is supporting EUR/USD on Tuesday. The pair currently trades flat on the day, though has again been unable to hold to the north of the 1.0800 level, likely keeping the bears confident that an eventual retest of last week’s annual lows in the 1.0750 area will eventually be retested.

Indeed, most FX strategists and market commentators continue to favour EUR/USD heading lower as a result of a widening divergence between the Fed and ECB’s response elevated inflationary pressures. Whilst the ECB is expected to do little more than end its QE programme and may implement a few rates hikes by the year’s end, some Fed members (James Bullard on Monday) are even now talking about a potential 75 bps rate hike at next month’s meeting.

The Fed/ECB divergence story will be in focus on Thursday when both ECB President Christine Lagarde and Fed Chair Jerome Powell speak at this week’s IMF/World Bank meetings. The EUR/USD bears are eyeing a test of 2020 lows in the 1.0600s, with the backdrop of recent negative developments in the Russo-Ukraine conflict (Russia ramping up its assault in the east) also being cited as supportive of further downside.