EUR/USD - Treasury yield curve, US-German yield spread signal USD weakness, Is 1.20 on the cards?

Monthly 50-MA is a tough nut to crack - The EUR/USD spot clocked a high of 1.1893 yesterday, but failed for the second day to end the day above the monthly 50-MA level of 1.1871. The currency pair was seen chipping away the key MA hurdle in Asia amid caution ahead of the US non-farm payrolls and wage growth data release. 

The yield curve is flattest since late June

The US dollar loves a steeper yield curve and vice versa. As of now the curve between the 10-yr note and the two-year note stands at 88 basis points bps, the lowest level since June 28. On the chart above, we also see a bearish symmetrical triangle breakdown, which signals the flattening of the yield curve from the Dec high of 135 bps has resumed. 

US-German 10-yr yield spread - Falling channel intact

The descending trend line on the chart above indicates the yield spread could continue to narrow in favor of the EUR. Only a breach of trend line resistance would offer hope for the USD bulls. 

Focus on US wage growth

The yield curve would steepen and the US-German yield spread could jump, leading to a drop in the EUR/USD pair if the US wage growth number betters estimates. On the contrary, a weak data could lead to further flattening of the yield curve and a broad based USD sell-off, in which case the EUR/USD could inch closer to 1.20 handle. 

EUR/USD Technical Levels

A break above 1.1876 [June 2010 low] would open doors for a move above 1.19 [psychological level]. The 14-day RSI and the weekly RSI are extremely overbought. So gains above 1.19 handle may not be sustainable.  A big resistance is seen directly at 1.2042 [July 2012 low]. 

On the downside, support is seen at 1.1849 [5-DMA] and 1.1769 [10-DMA]. Both the averages are sloping upwards hence dips could be short lived. Only an end of the day close below 1.1723 [July 31 low] would indicate potential for a serious pullback in the pair.