EUR/USD - Rates futures put EUR on the back foot ahead of the Fed

• Interest rate futures signal ECB likely to delay tightening.
• Bond yield spreads favor USD. 
• A hawkish Fed could push EUR/USD below 1.20.

The EUR/USD remains trapped in 1.2250-1.2450 range even though the top European Central Bank (ECB) officials stressed this week that stimulus will end only after inflation starts moving towards the 2 percent target.

However, the Eurozone interest rate futures have started pricing-in a delay in the ECB tightening.  For instance, the European Interbank Offered Rate (EURIBOR) three-month futures daily chart shows a bullish breakout, meaning the yields will likely fall (investors are digesting the dovish ECB).

FEIMR (Euro 3 month Euribor future)

Yield spreads continue to rise in the USD-positive manner

Further, the two-year US-German bond yield spread stands at 285.67 basis points - the highest level since 1997. Meanwhile, the 10-year yield spread has risen to 225 basis points, its highest level since December 2016.

So, the current levels in the EUR/USD are unjustified and the common currency is on the defensive ahead of the Fed.  The pair may drop below 1.20 if the Fed revises its dot plot forecast to four (or five) rate hikes this year from the December forecast of three rate hikes.

EUR/USD Technical Levels

The pair clocked a low of 1.2295 in Asia and was last seen trading at 1.2309. The pullback from 1.2413 (March 14 high) has established another lower high on the daily chart and suggests the erratic rise from 1.2273 (March 9 low) has ended. That said, only a clear break below 1.2273 would signal resumption of the sell-off from 1.2446 (March 8 high) and open doors for 1.2206 (Feb. 9 low) and 1.2154 (March 1 low).

On the higher side, a close above 1.2413 would allow a stronger rally to 1.25 (psychological level + multiple daily highs) and 1.2538 (Jan. 25 high).