Euro Rally Falters as Yield Spreads Drive Trade

The Euro has lost its momentum against the US Dollar, and its recent rally seems to be stalling. According to Scotiabank strategists Shaun Osborne and Eric Theoret, this is due to price action mirroring yield spreads.

Markets are still pricing in a hawkish European Central Bank (ECB) path, with expectations of 24 basis points of tightening in September and 40 bps by year-end. This reflects the ECB's continued focus on inflation control despite resilient euro area growth.

Sentiment remains constructive, however, with risk reversals showing a modest premium for EUR strength. The RSI (Relative Strength Index) remains firmly in bearish territory, hovering around the overbought threshold at 70.

The price action has revealed short-term support in the mid-1.16s, and there is potential for more meaningful support closer to the 200-day MA at 1.1633.