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.

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

 

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