In the past few months, if you can crack analysis of the German 10 year Bund yield, you would get a very strong clue as to the direction of EUR/USD and also the DAX Xetra. The euro has been storngly positively correlated to the euro, whilst the DAX has been running a negative correlation to both. The past few days has seen the Bund yield rocket higher through huge resistance around 0.800% and this suggests that key levels on both euro and Dax could not be coming under pressure.
The Bund yield has broken out under significant volatility. In his ECB press conference yesterday, Mario Draghi effectively said, “get used to it”, whilst staff projections showed an upward revision to inflation forecasts for the Eurozone in 2015. Neither helped to calm the huge upside break on German yields. Temporarily there seems to have been psychological resistance coming in at 1.00% which has capped the rise today, but there is little reason to suggest that this move will not continue.
Technically the breakout above 0.800% on the bund yield (0.796% to be exact) continues a bullish falling wedge pattern that implies an upside target of 1.22%. The volatility is unlikely to settle any time soon, but the breakout level at 0.800% now becomes supportive.
The chart below shows (in the past few weeks especially) EUR/USD following the moves on the Bund yield, but yet to make the equivalent breakout above $1.1465 which was the key May high. The intraday pullback on the bund yield could stunt the immediate upside in the euro, however, the outlook remains positive and any further gains on the bund yield will be supportive for the euro.
The DAX is also taking the opposite path and is now looking to test the key May low of 11,187. If the Bund yield does not sharply retrace (ie. back below the key 0.800% breakout) then it is likely that both the Euro and the DAX will put increasing pressure on these key levels.