EUR/USD inter-markets: declining yield spread points to a pause/retracement ahead of Friday US GDP release

The EUR/USD pair extended its sharp rebound from yesterday's intraday low level of 1.0960 and touched a 9-day high level of 1.1120 before retracing a bit to stabilize around 1.1100 handle. 

On Wednesday, the US Federal Reserve announced its monetary policy decision and left interest rates unchanged in the range between 0.25% and 0.5% and showed its willing to go ahead and lift interest rates in September. After an initial reaction, the US Dollar turned sharply lower on skepticism over such an action in September and was reflective in Fed fund expectation that dropped sharply after the announcement. The major’s up-move was also accompanied by a slide in Volatility Index (VIX), which pointed to risk-on sentiment and dented safe-haven demand of the US Dollar. 

On Thursday, the pair got an additional support from slightly higher-than-estimated prelim German CPI print for the month of July, which could be seen as a precursor of Friday's release of the flash version of composite Euro-zone CPI figures. Meanwhile, a modest recovery in German and US 10-years treasury yields limited further upside for the major. Adding to this, declining yield spread also seems to provide some advantage to the US Dollar.

Going forward, the quarterly release of US GDP growth for the second quarter of 2016, due on Friday, will now be the next key trigger determining the next leg of move for the pair. A positive surprise would keep hopes of an eventual Fed rate-hike alive and should be highly supportive for the US Dollar in the near-term.

Trade the US Gross Domestic Product - July 29 GDP Live Coverage