EUR/USD Analysis: Increased odds of a drop to 1.20
|- Technicals favor a drop to the psychological support of 1.20.
- No fireworks expected from the ECB, hence yield spread will likely continue to rise in the EUR-negative manner.
- Options market shows increased demand for the EUR puts.
Daily chart
The pair breached the ascending trendline (drawn from the April 2017 low and November 2017 low) in a convincing manner on April 20, signaling long-term bullish invalidation. Further, a downside break of the pennant pattern confirmed on April 23, has boosted the odds of a bearish breakdown of 1.2150-1.2550 trading range. The 5, 10, 21MA are biased bearish (sloping downwards) and the relative strength index (RSI) has dipped below 50.00 (bearish territory).
Weekly chart
The bearish RSI divergence and a downside break of the pennant suggest scope for a further decline in the EUR/USD. The 5-week MA and the 10-week MA are biased bearish.
And last but not the least, the spread between the 10-year US treasury yield and the German 10-year bond yield stands at 236.8 basis points - the highest level since 1989 and could rise further in the EUR-negative manner as the 10-year treasury yield looks set to scale the 3 percent mark in a convincing manner.
Read:
Increased demand for EUR puts (bearish bets)
ECB Preview: no fireworks expected this Thursday - Barclays
View
EUR/USD looks set to test 1.20 (psychological support + 200-day MA) in a week or two. A break below that level would trigger stops on positional longs and hence could set the tone for a deeper and faster sell-off to 1.1709 (38.2 percent Fibonacci retracement of 1.0341-1.2556).
On the higher side, only a daily close above the 10-day MA would abort the bearish view.
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