Crude Oil Dominates EUR/USD and USD/JPY Movements as FX Markets Struggle with Identity Crisis

The EUR/USD and USD/JPY pairs are experiencing an identity crisis as they seem to be moving in tandem with crude oil futures rather than traditional FX market forces.

Recent data shows a strong correlation between Brent crude prices and the US yield curve, particularly in the belly and long end of the curve. This has led to a strengthening relationship between Brent crude and the US 10-year Treasury yield, with the strongest link seen in the belly and long end rather than front-end rates.

The EUR/USD pair is also closely tied to movements across the US yield curve, with an almost lockstep inverse relationship between shifts in US yields and movements in EUR/USD. However, despite this strong correlation, the technical picture for EUR/USD still favors selling strength and downside breaks, with the risk of a downside break elevated if 1.1325 support is cracked.

The USD/JPY pair also exhibits strong inverse relationships between US and German two, five, and 10-year yield spreads, likely reflecting sovereign debt markets moving in response to crude oil futures. The linkages between USD/JPY and movements across the US curve and front-end rate spreads remain strong and sustained, but are complicated by the ongoing threat of intervention from Japanese or US authorities.