Rates Spark: USD-EUR Spreads Can Widen More

2025-02-11 04:20:00 ET

Summary

• Since the US elections, the correlation between US rates and euro rates has declined significantly.
• Before the elections in November, more than 50% of the daily variation in 10Y euro swap rates could be explained by changes in the UST yields. This is reduced to 14% since.
• A move lower in euro rates can, therefore, widen USD-EUR spreads even further.

By Michiel Tukker , Benjamin Schroeder , Padhraic Garvey, CFA

Spread between USD and EUR rates can widen further

Since Trump's election, global rates seem less correlated to US rates, also helping the euro swap curve move more independently. Trump’s tariff threats, for instance, are seen as inflationary for the US, whilst potentially deflationary for the targeted country, triggering opposite rate reactions. In the eurozone we already saw a strong repricing for more European Central Bank cuts when Trump initially threatened with tariffs against Canada, Mexico and China - whilst the impact was on the hawkish side for the Fed. The latest reaction to Trump's steel tariffs had almost no notable impact on euro rates....

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