EUR/USD falls back under 1.0850 as US yields rally, having rejected 21DMA in 1.0930s

• EUR/USD has reversed back from highs in the 1.0930s to under 1.0850, with the pair taking cues from yields spreads.
• EUR/USD was supported in early European trade by hawkishness from the ECB VP, but reversed amid a US yields rally.
• With the pair having rejected its 21DMA, bears will be eyeing a near-term test of annual lows around 1.0750.

Movements in yield spreads as a function of rhetoric from central bankers dictated the price action for EUR/USD on Thursday. Comments from the usually dovish leaning ECB Vice President Luis de Guindos earlier in the European morning regarding the possibility of lift-off in July sparked a rally in Eurozone yields that lifted EUR/USD has high as the 1.0930s.

However, since the start of US trade, US yields have gained upside momentum amid hawkish Fed chatter (2s +13 bps to above 2.70% and 10s +11 bps to the mid-2.90s%), triggering a reversal back below 1.0850. A solid US weekly jobless claims report, disappointing US Philly Fed manufacturing survey and slightly better than expected Eurozone Consumer Confidence survey all had little impact on the pair.   

Where, at earlier session highs, EUR/USD had traded with on the day gains of about 0.75% and tested its 21-Day Moving Average, the pair now trades with modest losses of about 0.1% in the 1.0830s. Focus now turns to upcoming remarks at 1800BST from both of the heads of the Fed and ECB and focus looks set to remain on the policy divergence between the two banks.

Whilst the ECB is now seen lifting interest rates by as much as 75 bps this year to end its negative interest rate experiment, US money markets pricing are now pricing interest rates ending the year at 2.95%, meaning an implied more than 250 bps in additional rate cuts over the next six meetings between now and December. This massive rate advantage that the US holds over the euro, despite recent hawkish ECB shifts, its making it tough for EUR/USD to sustain rebounds.

After the pair rejected its 21DMA in the low-1.0900s, short-term bears will be eyeing a push lower back towards annual lows around 1.0750. Over the slightly more medium term, bears will be eyeing a test of the 2020 lows in the 1.0630 area.