EUR/USD: Inverse head-and-shoulders breakout may remain elusive on rising US-DE yield spread

The daily chart of the EUR/USD is flashing a bullish reversal pattern, but a breakout may remain elusive, as the bond yield differentials are rising in the EUR-negative manner.

At press time, the EUR/USD is trading at 1.1672 and the inverse head-and-shoulders neckline is located at 1.1713. A close above that level would imply that sell-off from the February high of 1.2556 has ended and the bulls have regained control.

However,  it is easier said than done, as the spread between the US and German bond yields are rising in favor of the EUR/USD bears.

For instance, the 10-year yield spread currently stands at 257 basis points - the highest level since Aug. 8. More importantly, the two-year spread, which is more sensitive to interest rate expectations, is hovering at 233 basis points - the highest level since 1989.

The currency pair may find acceptance above the inverse head-and-shoulders neckline if US-DE yield differential drops sharply, although the odds of the spread rising further are high, as the Fed is expected to raise rates next week. The EUR could also pick up a bid if the Chinese yuan posts big gains against the USD.

EUR/USD Technical Levels

Resistance: 1.1713 (inverse head-and-shoulders neckline), 1.1791 (July 9 high), 1.1852 (June 14 high)

Support: 1.1666 (200-day moving average), 1.1605 (50-day moving average), 1.1526 (Sept. 10 low)