EUR/USD rally contradicts the uptick in two-year US-DE yield spread, focus on US retail sales

The EUR/USD jumped 74 pips yesterday, strengthening the short-term bullish technical setup.
The bullish move, however, contradicts the rise in the two-year US-Germany bond yield spread to fresh multi-decade highs.
A below-forecast US retail sales could accentuate the bullish pressure around the EUR/USD.

Omkar Godbole FXStreet Contributor

The EUR/USD has found acceptance above the 100-day moving average for the first time since April 25.

The common currency picked up a strong bid yesterday after the European Central Bank (ECB) sounded optimistic about prospects for inflation, bolstering the already bullish technical setup: the falling wedge breakout and the ascending 5-day and 10-day moving average (MAs).

So, it seems safe to say that the path of least resistance is on the higher side. However, the bullish technical setup contradicts the widening US-Germany (DE) yield differential. For instance, the two-year yield spread has risen to 331 basis points today - the highest level since 1989. As a result, the rally looks unsustainable.

That said, the pair could continue to defy the USD-positive yield spread if the risk assets remain well bid and more importantly, the US August retail sales figure prints below estimates.

The data, scheduled for release at 12:30 GMT, is expected to show that consumption, as represented by retail sales, rose 0.4 percent month-on-month in August, following a 0.5 percent rise in July.

Moreover, an above-forecast reading would reinforce expectations that domestic demand would cushion the US economy from external shocks and could put a bid under the USD. On the other, a weak figure could force the investors to scale back the expectations of faster Fed rate hikes.

At press time, the currency pair is trading at 1.1695

EUR/USD Technical Levels

Resistance: 1.1733 (Aug. 28 high), 1.1791 (July 9 high), 1.1852 (June 14 high)

Support: 1.1677 (100-day moving average), 1.1641 (5-day moving average), 1.1621 (10-day moving average)

	TREND INDEX	OB/OS INDEX	VOLATILY INDEX
15M	Bearish	Neutral	Expanding
1H	Bullish	Neutral	Low
4H	Bullish	Overbought	Expanding
1D	Bullish	Neutral	Shrinking
1W	Bearish	Neutral	Low
Updated Sep 14, 04:00 GMT

Author

Omkar Godbole

FXStreet Contributor

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

GBP/USD clings to daily gains near 1.3350

GBP/USD holds just in positive territory around 1.3350 on Friday as the Greenback keeps a vacillating price action. With Fed rate hike expectations easing and US markets closed for the Independence Day holiday, Cable remains on track to post solid weekly gains.

EUR/USD remains sidelined around 1.1440

EUR/USD holds on to its recent gains and consolidates around 1.1440 at the end of the week as the US Dollar lacks clear direction. In the meantime, trading conditions remain subdued, with volatility constrained by the closure of US markets for the Independence Day holiday.

Gold flirts with two-week highs, targets $4,200

Gold extends its recovery for a third straight day, advancing toward the $4,200 mark per troy ounce on Friday. The precious metal looks set to snap a four-week losing streak as softer-than-expected June US NFP data prompt investors to scale back expectations of further Fed tightening.

Crypto Today: Bitcoin, Ethereum, XRP advance amid renewed capital inflows

Bitcoin maintains its upward momentum, holding above the $61,000 mark at the time of writing on Friday. Major altcoins such as Ethereum and Ripple are also posting gains, signaling a modest uptick in market sentiment and renewed risk appetite among investors.

The Iran war failed to trigger a recession. Can the US economy keep defying expectations?

Nearly four months after the start of the Iran war, the US economy remains remarkably resilient. While the conflict initially triggered a severe disruption to global energy markets and a sharp rise in Oil prices, recent diplomatic progress between Washington and Tehran has eased concerns about a prolonged supply shock.

Kevin Warsh offers no policy clues: Why markets still got their answer

Financial markets came to Sintra looking for clues about the Federal Reserve's (Fed) next move. They largely left with confirmation that Fed Chair Kevin Warsh intends to make those clues much harder to find.