EUR/USD bears pile in on stronger US yields and force the bulls into retreat mode

• EUR/USD bulls are being beaten back as US yields pop. 
• The focus will soon turn back to the ECB. 

At 1.0720, EUR/USD is 0.2% higher on the day so far. The price has travelled up from a low of 1.0671 to reach a high of 1.0748 so far. However, the bears are moving in following the US 10-year auction that hit a high yield of 3.03% on Wednesday, up from the 2.943% high in the previous auction.

We have seen a subsequent rally in US yields and the 10-year now stands 1.54% higher on the day, supporting the greenback ahead of key macro events later this week. These will include the European Central Bank tomorrow, Thursday, and US inflation data Friday.

Meanwhile, the US dollar has caught a bid on the auction and rising yield, and the DXY index that measures the greenback vs.a basket of major rivals is currently up 0.17% to 102.50. The DXY has been trading between the lows and highs of the day, 102.269/102.776. US equities are also sinking in midday trade which tends to favour the greenback as follows:

(S&P 500 vs DXY daily chart)

ECB in focus

In a strongly-foreshadowed decision, analysts at TD Securities expect ''the ECB to announce that the APP will end within weeks, and send a strong signal that rate hikes are coming in July and September (October remains a more interesting meeting in this sense). Forecasts will show stronger inflation and weaker growth, highlighting the ECB's challenge going forward.''

Meanwhile, analysts at ABN Amro said ''we expect economic growth to slow considerably to clearly below trend rates from early next year. The economy has a number of cushions in the near term, such as continued post-Covid recovery in the services sector, significant household excess savings and unsatisfied demand for everything from industrial orders to employees.''

''However, these cushions will likely deflate next year, just as the impact of monetary tightening in the eurozone and globally feeds through. At the same time, the policy rate by then would be closer to more normal levels.''

As for trading the ECB, the analysts at TD Securities said ''unless Lagarde commits to a series of 50s, EUR/USD has limited room to gain, particularly with the euribor curve trading where it is and US CPI due the next day. Risk/reward more favourable for EURUSD to trade lower. Long-term inflation forecast will be key.''