EUR/JPY: 2-year DE-JP yield spread holds the key

• EUR/JPY has enjoyed the biggest winning streak since mid-July.
• The pair is tracking the 2-year German (DE)-Japan (JP) bond yield spread.

The EUR/JPY pair rose to a 3.5-year high of 130.27 on Tuesday and closed well above the trendline sloping downward from the July 17 high and Aug. 1 high.

More importantly, it was the sixth consecutive day of gains - the pair's biggest winning streak since early/mid-July.

A look at the bond markets reveals the spread between the 2-year German bund yield and the 2-year Japanese government bond yield is guiding the pair higher. For instance, the spread has risen from -0.53 basis points (bps) to -0.47 bps in the last 18 days. During the same time period, the EUR/JPY cross has rallied from 124.90 to 130.00.

Interestingly, the spread dropped from -34 basis points to -0.63 points in the period between mid-Feb and late May, driving the EUR/JPY down from 137.51 to 124.62.

So traders need to keep an eye on the two-year bond yield spread. At press time, the pair is trading at 130.00 and the yield spread is standing at -0.48 bps.

EUR/JPY Technical Levels

Resistance: 130.27 (previous day's high), 131.15 (July 31 high), 131.30 (200-day MA)

Support: 129.71 (50-hour MA), 129.57 (100-day MA), 129.19 (100-hour MA)