- The unwinding of EUR/JPY shorts triggered a bullish break in the EUR/USD.
- Risk reversals adopt a bullish bias, signaling increased demand for EUR calls.
- Technicals favor a rally to 1.25-1.2550, MAs trend higher.
The risk-on action in the equities on Monday triggered an unwinding of the EUR/JPY shorts. The resulting demand for the common currency pushed the EUR/USD to 1.2462 – the highest level since Feb. 16.
Also, the one-month 25 delta risk reversals turned positive yesterday, signaling the implied volatility premium for EUR calls is higher than the implied volatility premium for puts, i.e. the investors are seeking upside protection (EUR calls) against a further rise in the spot.
Further, the daily chart shows the pair has breached the descending trendline (sloping downwards from the Feb. 16 high and March 8 high) in a convincing manner, signaling a continuation of the rally from the March 1 low of 1.2154. The 5, 10 & 20-day moving averages (MA) are trending north (bullish formation) and pointing higher. On similar lines, the 50-day MA, 100-day MA and 200-day MA are positioned in favor of the bulls.
Clearly, the spot looks ready to revisit the Feb. 16 high of 1.2556 and may possibly break higher towards 1.26 if the risk assets remain bid and the Eurozone sentiment/business confidence numbers due at 09:00 GMT better estimates.
EUR/USD Technical Levels
As of writing, the pair is trading at 1.2450. A break above 1.25 (psychological level) would target 1.25 (psychological number) en route to 1.2556 (2018 high Feb.16). On the flip side, immediate contention emerges at 1.2329 (21-day MA) followed by 1.2206 (low Feb.9) and finally 1.2165 (low Jan.18).