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EUR/USD - Focus on US tax plan, yield differential drops in USD-negative manner

  • EUR/USD jumps to 1.1650.
  • 10Y US-German yield spread narrows in USD-negative manner.
  • Focus on US tax plan.

The EUR/USD rose to a four-day high of 1.1655 on Thursday as USD was offered on signs the Senate would ask for a one-year delay in cutting corporate taxes to 20%.

However, the rally stalled in late NY session/early Asian session on signs of support from influential Senators. The currency pair struggled in Asia to break above the previous day's high of 1.1655 levels.

Focus on US tax plan

Kathy Lien from BK Asset Management writes, "the Senate's plan could be out as quickly as Friday and if not, sometime early next week.  Either way, the Senate plan will look different from the House plan and how different, it reads will determine how the dollar trades."

GOP dissent is running and fears of delay on the US corporate tax cut could keep the USD under pressure. Also, the 10-year German-US bond yield spread could continue losing altitude, if the equities remain risk-averse.

Yield spread

The above chart shows -

  • The yield spread has declined from 204 basis points (bps) to 196 bps in the last 10 days.
  • The narrowing of the spread clearly favors upside move in the EUR/USD pair.

EUR/USD Technical Outlook

Valeria Bednarik, Chief Analyst at FXStreet, writes-

" The pair holds on to its intraday gains, short-term poised to extend its advance according to technical readings in the 4 hours chart, as indicators head north well into positive territory, while the price recovered above its 20 SMA, now slowly turning higher around 1.1600. In the wider picture, however, the upward potential is still limited, given that the price is below the 1.1660region, where it bottomed since early August and until the end of October. Spikes towards 1.1690 were quickly reversed last week, with the pair unable to settle above the key resistance area. That said, the EUR/USD pair could only enter in a bullish stage on a recovery beyond the 1.1720 region."

Support levels: 1.1550 1.1510 1.1460

Resistance levels: 1.1660 1.1690 1.1720


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