In todays article I will look the difference between German and US bond yields can give us hints about where the Euro-Dollar exchange rate might be headed.
Simply put, if this difference gets smaller, the Euro tends to drop in value against the Dollar. And if it gets bigger, the Euro usually starts to pick up.
Why Bond Yields Matter
When central banks, like the US Federal Reserve, change their policies, it affects how much interest you can earn on bonds. Lately, the US has been increasing interest rates quite fast, which usually slows down the economy after a while. Looking ahead to 2024, the big question is whether the central banks will stop hiking rates or even start lowering them if the economy slows more than we think it will.
Inflation, or the rate at which prices go up, is also super important. If inflation falls closer to 2% by early 2024, people will start to believe that the Federal Reserve might stop raising rates. This belief could then lead to a decrease in US bond yields, and as a result, the difference between German and US bond yields might increase, which has in the past meant a stronger Euro.
Charts and Patterns
The charts I am looking at show a pattern called an a-b-c formation tha unfolded in 2023. This pattern hints that the difference in yields could be at the support soon. Plus, there are a lot of large speculators heavily short based on COT data which might also suggest that yields could change direction, due to the sentiment.
So, if US bond yields start to go down in 2024, the difference between German and US bond yields could increase. This change could make the Euro stronger compared to the Dollar. I think that the exchange rate might have strong support around the 1.04 mark by the end of this year, and if things line up, we could see a big move up in 2024.