EUR/USD is carving out the risk of an imminent downside breakout, US yields rocket to the moon (and back?)

EUR/USD is up into the close on Wall Street by some 0.12% as the US dollar lags the soaring US yield environment and despite markets pricing in the Federal Reserve's terminal rate of around 5%. Risk sentiment has been fickle this week, playing into the hands of the euro bulls at times of risk-on. Earnings season and UK politics have been a drive in that regard, but the focus will now turn to the central banks again, which is the US dollar's playing field, casting a dark cloud over stocks and high beta currencies, such as the euro for the week ahead. 

In trade on Thursday, the US dollar found some relief on the comments from Federal Reserve Bank of Philadelphia President Patrick Harker who said the central bank is not done with raising its short-term rate target amid very high levels of inflation. His most hawkish of remarks sent yields to fresh cycle highs, the strongest in a decade. He said the Fed has made disappointing progress at lower inflation and added that inflation in 2023 would fall to around 4% and 2.5% in 2024, which is still well above the 2%. as such risk sold off, yield and the greenback rallied weighing on the euro in the latter part of the US morning trade. Bond yields rose, with the US 2-year note last seen paying 4.593%, up 0.75%, after reaching to the highest since 2008 at 4.614%. The US dollar weakened, with the DXY index last seen down 0.15 points to 112.85 having moved between a low of 112.16 and 113.09.

As for events on the week and today's session, a spate of mixed quarterly corporate results and economic indicators provided some evidence of an economic slowdown, but a dip in jobless claims showed the Fed's aggressive campaign of interest rate hikes has had little effect on the tight US labour market. Financial markets have now fully priced in yet another 75 basis point interest rate hike from the Federal Reserve when it meets next month, according to CME's FedWatch tool, and there is where the euro bulls' hard work could come undone as per the technical analysis below. 

EUR/USD technical analysis, H4, H1 & daily chart

The price is under pressure within a coil and is testing the outer rims of the triangle to the downside, pressured by rising US yields and the US dollar:

(US 2-year yields at a decade high).

The US dollar, as per the DXY index could be on the verge of another surge to catch up with soaring US yields, which does not bode well for the euro: 

The confluence of the bullish flag pattern and W-formation, with the correction, supported the neckline meeting a 50% mean reversion and trendline likely give fuel for the bulls.

Meanwhile, a bearish scenario on the hourly chart could be as follows: 

We have seen three pushes into the topside of the coil and a subsequent blow-off into longs with perhaps more of a long squeeze to play out before a correction. This will put the 0.9780/75 under pressure which guards the 0.9750 support block and 0.97 the figure below there. in doing so, the bears will be in control below the triangle with lower lows on their radar:

However, risks to the bearish thesis may lie in the hands of the Bank of Japan as the threat of intervention, by selling the US dollar and buying the yen, guarding the 150.00s area. This could have widespread ripple effects in the forex markets, potentially stripping the greenback of such a move as outlined above, at least for the while the market is impacted by intervention:

If the market decides to front run such a risk, considering no trader wants to be offside by 500 pips on actual intervention, as what happened on 22 September during the BoJ's bid for the yen (resulting in a 90 pip rally in the euro and a sharp drop in US yields), a 100 pip move to 149.00 could evolve in the near term, ahead of the Federal Reserve November 1/2.