Fundamental Evaluation Series: EUR/USD vs. 2-year yield spread

The chart above shows, how the relationship between EUR/USD and 2-year yield spread (U.S. - Eurozone) has unfolded since 2012. It is evident that these short rates have been a key influencing factor for the pair as policy divergence became evident since 2013.

The chart clearly shows the close relationship between yield spread and the exchange rate. Since December 2013, the yield spread declined from -0.2 percent area to -3.56 percent area by November 2018, and EUR/USD declined from 1.38 to 1.13 area.

Since the second week of November, the yield spread has reversed course, and rose from -3.56 percent to -3.26 percent, which suggests there might be a reversal in the exchange rate going ahead, should the spread continue its reversal. The reversal has so far been significantly rapid. The euro is currently trading at 1.142 against the USD.