EUR/USD - 5-week rally shows no signs of exhaustion as the US-German yield spread drops to Nov lows

EUR/USD jumped to a 2-year high of 1.1659 on Thursday as a mere suggestion by Draghi that the policy would be reviewed in the months ahead prompted FX markets to push the EUR higher. Draghi’s comments were taken as a sign that the ECB would curtail bond buying as early as September.

The currency pair traded in the sideways manner around 1.1630 in Asia and looked set to end higher for the fifth straight week. This would be the longest weekly running streak since 2012.

Weekly RSI: overbought for the first time since 2011

The 14-day RSI is overbought. The 1-hour and 4-hour RSI is overbought as well. More importantly, the weekly RSI is seriously overbought for the first time since April 2011. Hence, a technical correction cannot be ruled out.

But, the yield spread favors further losses

The US-German 10-year yield spread fell to 1.7020 this week - the lowest level since early November. The Fed is widely expected to slow down the process of policy normalization, while the ECB is expected to begin the QE taper in September. Thus, in the short-run, the yield spread is likely to remain under pressure as suggested by the falling trend line on the chart below.

The options market also favors further gains in the EUR/USD pair. The one-month 25 delta risk reversal is closely following the rally in the spot, suggesting there is little fear of a big pullback in the EUR.

EUR/USD Intraday Strategy

AceTrader team says, “Buying euro on dips is still the favoured strategy as the trend is your friend. Bids are noted at 1.1620-00 area with stops reported below 1.1580. Some offers (profit taking) are touted at 1.1650/60 and more above with stops above 1.1615 (2015 high).”

A move to 1.18 is inevitable - Kathy Lien

Kathy Lien from BK Asset Management writes, “A move to 1.18 is inevitable as long as ECB officials don't jawbone the currency but 1.20 would require strong PMIs.”

EUR/USD Technical Levels

Resistance: 1.1641 (Nov 2005 low), 1.1685 (23.6% Fib R of 2008 high - 2017 low), 1.1714 (2015 high)

Support: 1.1561 (5-DMA), 1.1494 (10-DMA), 1.1478 (1-hour 200-MA)