EUR/USD experienced a volatile session on Tuesday, initially falling on reports of escalating Ukraine-Russia tensions but later recovering as fears of further escalation eased. The focus shifted back to yield spreads, a dominant driver of EUR/USD in recent months. The pair’s decline from above 1.1200 to below 1.0500 since mid-September was fueled by a widening U.S.-euro zone yield differential. However, the spread tightening observed over the past week has provided relief to the euro. The German-U.S. 2-year yield spread hit its tightest levels since November 8, narrowing Fed and ECB terminal rate expectations to -185bps from -202bps, which helped support EUR/USD.
Technically, EUR/USD has shown resilience near the psychological 1.0500 level, which coincides with strong structural support. Short-term momentum indicators, including RSI, suggest that bearish pressure is easing. A further narrowing of yield differentials, coupled with supportive euro zone economic data such as November PMI, could catalyze a short squeeze, reducing the likelihood of a break below the 1.0450/1.0500 support zone. On the upside, resistance lies at 1.0600, followed by the 21-day moving average near 1.0650.
Investors should monitor geopolitical developments and upcoming euro zone data for directional cues. If euro zone PMIs indicate stabilization or improvement, EUR/USD could regain upward momentum. Conversely, any deterioration in economic sentiment or resurgence in geopolitical tensions could pressure the pair back towards the 1.0450 region, making the upcoming sessions critical for determining the medium-term trajectory.