EUR/USD inter-market: Looks vulnerable below 1.1200, Fed in focus

After a brief period of upside consolidation near 1.13 handle in the overnight trades, the EUR/USD pair finally broke to the downside heading into Europe this Tuesday, as lingering Brexit fears continue to spook markets.

The main currency pair was hit by a fresh selling wave post-European open and crashed like a pack of cards to fresh weekly lows ahead of 1.12 handle. The renewed sell-off can be partly attributed to a sharp upward spike in the VIX index (CBEO Volatility Index), a fear barometer, from 21.55 region to just above 22 handle. However, the main catalyst behind the latest downward rally is the crashing German bund yields, which hit new record lows amid mounting concerns that the euro may collapse if Britain were to leave the European Union. Hence, investors sought the German bunds as the safest investment option against the backdrop of intensifying Brexit concerns.

Germany's 10-year bond yield fell to minus 0.028%, down 5 basis points on day, while the 5-year bund yield hits a new record low at -0.464%, down 3 bps on day. While on the other hand, the US 10-year treasury yields also fell amid persistent risk-aversion, although the slope of its German counterpart was much steeper, suggesting yield spread remains USD positive.

Looking ahead, all eyes now turn towards the Fed two-day policy meeting commencing today, with the outcome on the interest rates due tomorrow. Although it’s widely anticipated that the Fed will keep the policy steady this month in response to the disastrous May jobs report.