EUR/USD Outlook: Scenario with Yield Spread

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The chart suggests a few key points about EUR/USD:

What is the Yield Spread?

The yield spread is simply the difference between the interest rates (or yields) of two different bonds, usually from different countries or types of bonds.

For example, in this analysis, we’re looking at the yield spread between German 10-year bonds and U.S. 10-year bonds. If the U.S. bond yield is higher than the German bond yield, the yield spread is negative, making U.S. investments more attractive, which can strengthen the dollar compared to the euro.

In short, the yield spread gives us a quick way to see which country’s bonds are offering better returns, helping us understand currency trends.

1/ Yield Spread (Germany vs. U.S.)

The yield spread (pink line) is falling, showing that U.S. bonds offer better returns than German bonds. This makes the dollar more attractive than the euro, adding downward pressure on EUR/USD.


2/ EUR/USD Downtrend:

EUR/USD has been trending down, moving in line with the yield spread. If this trend continues, EUR/USD could keep dropping.
However, the RSI indicator shows oversold levels (below 30), suggesting a possible short-term bounce.


3/ RSI Oversold Signal:

With RSI in the oversold zone, EUR/USD might see a short-term rebound, although the main trend remains bearish.
Two Potential Scenarios

Scenario 1: Short-Term Rebound, Then Further Drop
What could happen: EUR/USD might bounce to a nearby resistance (around 1.0850) due to the oversold RSI. After that, it could resume its fall as the yield spread still favors the dollar.
Trading Tip: Look for sell opportunities if EUR/USD rises temporarily, expecting a continuation of the downtrend.

Scenario 2: No Rebound, Continued Downtrend
What could happen: If the yield spread keeps dropping, EUR/USD could fall directly to lower levels like 1.0600, with no significant rebound.
Trading Tip: Consider holding or adding to short positions if the spread keeps falling and supporting the dollar.

Conclusion:
The yield spread currently favors a strong dollar, which could continue to push EUR/USD lower. Although a short-term rebound is possible due to the oversold RSI, the overall trend likely remains downward unless there’s a shift in the yield spread.

However, it’s important to remember that the yield spread is only a powerful indicator, providing insight into the current market sentiment. This is just one possible scenario and should not be viewed as a guaranteed outcome. Market conditions can change rapidly, and no indicator is 100% reliable.