EUR/USD: Bears trapped, focus on German IFO

• The EUR/USD pair posted gains yesterday, despite the bearish technical setup. Dollar selling ahead of the Fed likely put a bid under the EUR/USD.
• Falling Italy-Germany yield differential and dovish Fed expectations could keep the EUR better bid today.
• The bullish tone, however, may weaken if the German IFO numbers miss expectations.

The EUR/USD pair on Monday closed well above the lower edge of the contracting triangle, neutralizing the bearish view put forward by Friday's triangle breakdown.

Essentially, the EUR bears have been trapped on the wrong side of the market. Moreover, the dollar was offered across the board yesterday on expectations that the Fed would either remove one hike from next year or by taking out the 2020 hike to reflect that the outlook for growth and inflation is modestly weaker than it was in September.

These expectations are likely to keep the EUR/USD better bid ahead of tomorrow's Fed decision. Further, easing concerns regarding Italy's budget issue, as represented by the narrowing spread between the 10-year Italian government bond yield and its German counterpart could also put a bid under the EUR.

As of writing, the spread stands at 272 basis points and could slide further in the EUR-positive manner as Italy expressed confidence yesterday that it would clinch a deal with the European Commission.

The upside in EUR/USD, however, could be limited if the  December IFO survey, due at 09:00 GMT, show a fourth consecutive dip in business confidence.

That said, the outlook would turn bearish only below Monday's low of 1.1299. At press time, the pair traded at 1.1354.

EUR/USD Technical Levels