EUR/USD: what is driving this curious price action? - Westpac

Analysts at Westpac explained that the bottom line is that the USD has been struggling to capitalise on firming data and yield support.

Key Quotes:

"When we break it down into chunks a meaningful asymmetry has emerged this year. Taking EUR/USD as an example, we find there’s an outsized bullish reaction by the currency on those trading days when there’s a Treasury driven move in yield spreads in EUR/USD’s favour. That accounts for much of the discrepancy between yields and the dollar this year. On all other trading sessions EUR/USD has behaved as much as one might have expected.

It’s not entirely obvious what is driving this curious price action but our analysis suggests it must be “negative developments” on the US side that affect the currency more than US yields. The aforementioned would seem to rule out diminished Eurozone political risks earlier this year as a reason for EUR outperformance. It may be a growing uncertainty premium around Powell, tax cuts and/or North Korea that is specifically affecting the currency more than fixed income yields but that’s not entirely satisfying either – why should these risks be priced more into the currency but not yields? Regardless, it begs the question - with the USD struggling to capitalise on key positives how will it trade when the trend in data surprises rolls over, as it assuredly will and with much of the Republican tax cuts priced in?"