EUR/USD bid above 1.2250, risk reversals & yield spread favors EUR

The EUR/USD remains better bid above 1.2250 and just short of the 3-year high of 1.2297 set yesterday as markets continue to price in the change in ECB's forward guidance early this year.

As of writing, the currency pair is trading at 1.2265 levels. German final CPI matched the preliminary estimate of 0.6 percent. Meanwhile, WPI (wholesale price index) fell 0.3 percent vs. the previous figure of 0.5 percent. Despite the weak WPI reading, the common currency is showing no signs of weakness.

Having rallied 2.97 percent since Jan. 9, the currency pair does look overbought as per the hourly and 4-hour RSI. Also, the RSI on the daily has hit the overbought territory.

However, related markets continue to favor further upside in the common currency. For instance, the 10-year US-German yield spread fell to 195.6 basis points (bps) today; the lowest since mid-November. The decline in the spread in the EUR-positive manner adds credence to the sharp rally in the spot.

Further, the EUR/USD one-month 25-delta risk reversals gauge rose to a 7 - week high of 0.55, highlighting the increased demand for EUR bullish bets (call options).

EUR/USD Technical outlook

Karen Jones, Analyst at Commerzbank writes, "EUR/USD remains on course to challenge the 1.2432 200 month ma. Support should be offered by the 1.2092 September high and the 20-day moving average at 1.1998 – the market will remain immediately bid above here.”

“Below 1.1998 will trigger losses to the 1.1872 uptrend. It will remain overall bid above the 1.1872 short-term uptrend and this guards the 1.1717/12 November and December lows. The 1.1712 mid-November low guards the 1.1553 7th November low.”