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EUR/USD – Down 2% from recent highs, but long-run bull outlook intact
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  • EUR/USD under pressure, possibly due to widening US-German (DE) yield differential.
  • However, risk reversals show long-term bullish outlook is intact.

The EUR/USD pair fell to 1.2265 in Asia – the lowest level since Feb. 12, tracking the post-Fed minutes rise in the treasury yields and the resulting widening of the US-DE two-year bond spread in the USD positive manner.

As of writing, the currency pair is trading at 1.2280 – down 2 percent from the Feb. 16 high of 1.2556. Currently, the two-year yield spread stands at 277 basis points; the highest level since 1988, according to Reuters data. The spread could rise further in favor of the USD as investors price-in a more hawkish Fed.

Also, the uncertainty surrounding the Italian elections and German SPD vote have strengthened the demand for EUR puts (bearish bets). “Two-week through 1-month expiry risk reversals have shown a growing implied volatility premium for EUR puts (sell EUR) over EUR calls (buy EUR) this week”, according to a Reuters report.

However, the long-term outlook remains bullish as the one-year risk reversals are being paid at 0.325 EUR calls (i.e. EUR calls are in demand or call premium is higher than put premium).

As for today, the common currency could take cues from the German IFO readings (due at 09:00 GMT) and bond yield differential.

EUR/USD Technical Levels

Chief Analyst Valeria Bednarik writes, “In the 4 hour chart, technical indicators have recovered from oversold readings, but the pair remains below its 20 and 100 SMAs, with the shortest crossing below the largest, both around 1.2380, also a Fibonacci resistance. The pair will need to recover beyond the next resistance at 1.2425, to regain its bullish stance, while below 1.2300, chances are of further slumps for this Thursday.

Support levels: 1.2300 1.2260 1.2225

Resistance levels: 1.2380 1.2425 1.2460

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