EUR/USD - 1.15 conquered on Trump’s health care debacle, is the rally overdone?

The EUR/USD rose to 1.1538 in Asia; its highest level since May 2016 after the news of Trump’s health care debacle triggered concerns about the President’s ability to deliver tax reforms, thus leading to a broad based sell-off in the US dollar. 

Trump trade is long gone…

Call it Trump trade/Trump bump/Trumpflation… the hype is long gone. This is evident from the fact that the 10-year US Treasury yield fell to 2.10% (lowest since November) in mid-June. The 10-year breakeven inflation rate (long-term inflation expectations) also fell to 1.66 (lowest since November) in mid June. 

Hence, the health care debacle and the resulting fears of delay in tax reform should not come as a surprise to investors; given the bond markets have already erased the ‘Trump bump’. 
Moreover, the bond yield remained flat lined in Asia. The 10-year traded largely unchanged around 2.3%, even after the news of the demise of the health care bill hit the wires. Furthermore, the 14-day RSI is hovering dangerously close to overbought levels. Thus, caution is advised. 

Watch out for the treasury yields as the decline would indicate the markets are pricing-in a potential delay in the Fed tightening due to reduced odds of fiscal reforms. The decline in the yields would add credence to the EUR/USD rally. 

EUR/USD Technicals

James Chen from Forex.com writes, “A bullish breakout to new highs may be imminent, which could push the currency pair towards the next major upside target within the current uptrend at the key 1.1600 resistance level. Such a move would likely be contingent upon any signal from the ECB suggesting tighter monetary policy on the horizon. To the downside, if the ECB continues its characteristic dovishness, a resulting EUR/USD drop could pressure the currency pair back down to major support around the 1.1300 level.”

The spot was last seen trading around 1.1530. A break above 1.1534 (Aug 2015 high) could see the spot test supply around 1.16 - 1.1616 (May 2016 high). On the downside, failure to hold above 1.15 could mean a re - test of the session low of 1.1471.