EUR/USD: Bull Pennant vs Bearish yield spread
- The euro trading range continues to narrow, is creating a pennant on the daily chart.
- US-German yield differential favors a downside break.
The EUR/USD created a bearish outside-day candle on Thursday, suggesting the rally from the low of 1.2216 has ended.
That said, in a larger scheme of things, the currency pair is still stuck in a narrowing price range. Chartists would call it a bull pennant - prices rallied sharply from 1.1554 (Nov. 7 low) to 1.2556 (Feb. 16 high) and then turned sideways.
It is a bullish continuation pattern, meaning an upside breakout would signal a revival of the rally from the Nov, 7 low of 1.1554.
However, the odds of a bullish breakout appear low if we take into consideration the rising 10-year US-German yield differential. The spread jumped to 233.6 basis points earlier this week - the highest since December 2016 and was last seen at 231 basis points.
That said, an upside breakout cannot be ruled out, given the traditional market correlations (exchange rate and yield differential) have not worked in the last 6 months.
The currency pair will likely remain rangebound today as the data calendar is light. The breakout (bearish/bullish) could happen next week if the ECB signals a significant change in the monetary policy.
EUR/USD Technical Levels
As of writing, the pair is flat-lined around 1.2340. A move above 1.2361 (5-day moving average) would allow a rally to 1.2417 (April 17 high) and 1.2425 (pennant resistance). On the downside, a break below 1.2299 (April 12 low) would expose support lined up at 1.2240 (March 20 low) and 1.2216 (April 6 low).
Author
Omkar Godbole
FXStreet Contributor
Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.
