The euro is beginning this week with a four-week slide in tow. It has depreciated in eight of the past ten weeks. It fell in only three months in 2017 and has already fallen two this year. Nearly halfway through May, the euro is off almost a cent.

Widening interest rate differentials have some explanatory power. When interest rate differentials are moving in the US favor, the euro tends to be weaker, but when the spread stabilizes the euro strengthens.

The 10-year differentials went sideways in November through mid-January. This coincided with the euro's rise from around $1.1580 in early November to a high above $1.25 in January. The euro recorded its high a little above $1.2550 in mid-February as the 10-year differential widened from about 1.95% in mid-January to 2.17% by mid-February when it traded broadly sideways, through finished March near 2.24%. However, the spread widened in the US favor in April, and the euro broke out of its three-month consolidative phase to the downside. It reached nearly 2.40% in late April. It made a new high near 2.45% last week before easing. It is testing the 20-day moving average just below 2.39% now. As it comes off, the euro is staging a bit of a recovery, and it is gaining for the third consecutive session.

Behind the divergence of interest rates has been the divergence of inflation. In April 2017, US inflation was 30 bp on top of the EMU. This April it stood at 120 bp. It is wider than any time in 2017.  It briefly was at 132 bp in April 2016. That was the largest inflation differential since 2014 when it was more than 150 bp for the first time since reached 180 bp in late 2009. The Great Graphic here, created on Bloomberg shows the US-EMU inflation differential going back to 2001.

Deflating the EMU nominal yield by headline CPI indicates a real rate of about minus 65 bp. It bottomed in February 2017 near -180 bp. The 12, 24, and 60-month averages converge around current reading.