While peripheral yield spreads were a reliable gauge for EUR performance last year, the Eurostoxx 50 equity index became more relevant in Q1 13. More recently, however, the short-end German-US yield differential has become a more consistent indicator for EUR performance. For the time being, the 2y yield differential is trending higher, supporting the EUR, although we note that gains will likely become more difficult against wider range highs for the EUR. While rising US yields and USD strength elsewhere are likely undermining inflationary expectations in the US, German inflation expectations are also heading lower due to similar reasoning. German 5y breakevens are now suppressed to levels not seen in nearly a year.
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Barclays