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EUR/USD at 14 month highs, Will Yellen testimony lead to a steeper yield curve?

EUR/USD rallied to 1.1480 on Tuesday and extended gains to a 14-month high of 1.1484 in the Asian session today as the German bond yields resumed the rally, while the treasury yields underperformed on talks of Fed rate rise pause.

Key trend line hurdle breached

The resistance offered by the trend line sloping downwards from the August 2015 high and May 2016 high has been breached. Tuesday’s end of the day close was well above the trend line, which will now act as a support around 1.1464 levels.

Focus on Yellen testimony

Yellen will address the House Financial Services Committee in her twice-yearly Humphrey Hawkins testimony and to take questions from lawmakers. The central bank chief will most likely justify another rate hike this year. Republicans will also press Ms. Yellen for more details on the Fed's balance-sheet plans.

So far this year, the talk of balance sheet normalization has not rattled markets. Furthermore, markets widely expect and look comfortable with the idea of another rate hike in December. Thus, a sharp rise in the long duration treasury yields (steeper yield curve) is unlikely unless Yellen indicates a faster policy tightening path.

The greenback responds positively to steeper yield curve and vice versa.

EUR/USD Technical Levels

FXStreet Chief Analyst Valeria Bednarik says, "Technical readings in the 4 hours chart, are clearly bullish, as technical indicators head north at fresh July highs, whilst the price accelerated above its 20 SMA. October 2015 high at 1.1494 is the immediate resistance, with gains most likely accelerating above this last and scope then to advance up to 1.1713, the high set on August 2015."

The spot was last seen trading around 1.1480 levels. A break above 1.1495 (Oct 2015 high) would open up upside towards 1.1534 (late Jan 2015 high). The next major hurdle is seen directly at 1.1616 (Apr 2016 high).

On the downside, failure to hold above 1.1464 (trendline support) could yield a pullback to 1.1434 (5-DMA) and 1.1408 (10-DMA).

Dips could be short lived as the 5-MA and 10-DMA on both weekly and daily time frames are sloping upwards. On the daily chart, all three major averages - 50-MA, 100-MA & 200-MA - are aligned one below the other and sloping upwards. The daily RSI is still not overbought, suggesting potential for a further rally.

 TREND INDEXOB/OS INDEXVOLATILY INDEX
15MBullishNeutral Shrinking
1HBullishOverbought High
4HBearishOverbought Expanding
1DBearishOverbought High
1WBullishOverbought High

Author

Omkar Godbole

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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