The EUR/USD has rebounded strongly over the past couple of days, after holding around the key 1.20 handle. Rates have found support on the back of the ongoing “risk-on” and “reflationary” trades, something which has consistently weighed on the US dollar. The euro has found additional support from rising bond yields in Germany, with the 10-year bunds rising to their best levels since September 2020, as well as falling yields in Italy – both signs of investor optimism. The yield spread between Italian and German bonds has narrowed, which is exactly what investors want to see. In Italy, Mario Draghi, the former ECB head, has secured support to become the country’s next Prime Minister from two key parties, 5-Star Movement and the right-wing League. With politicians ready to put aside bitter rivalries for the good of the country, this has raised hopes for the prospect of government of national unity to take the country out of its current political crisis. Investors have warmed to the development by bidding up Italian stocks in recent days, as well as buying government bonds.
Hopes that the Italian political crisis might end has also helped to boost the euro in recent days, which is also beginning to look bullish again against the US dollar.
Meanwhile on the technical front, the saying that “what doesn’t kills you makes you stronger” is certainly the case for the EUR/USD. False moves and fakeouts are one of my favourite ways of engaging in the markets, a topic I have talked extensively on
these YouTube educational videos. Another example of this concept have been evidenced on the EUR/USD, in the form of a false trend break, on at least two occasions recently:
Source: ThinkMarkets and TradingView.com
As per the chart, the EUR/USD broken its short-term bull trend in October, trapped the bears, only to then rip higher. More recently, the world’s most heavily-traded pair broke its longer-term bullish trend last week, leading to a temporary move below the key 1.20 handle.
But as I mentioned in our
NFP preview webinar, this looks to be another false move. After reclaiming the trend line and the key 1.20 handle, rates have rebounded to 1.2115. The EUR/USD now needs to break through the 1.2150-80 resistance area to form a higher high. If this condition is met, then a run towards this year’s earlier high at 1.2350 is on the cards next, potentially ahead of a lager move to 1.25.
However, if rates go back below the 1.20 handle, this time we could see a more decisive breakdown, for this will be a “failure of the failure” move. The false break of the trend was a bullish signal, but if this turns out to be a false signal for the bulls instead, then the bears, smelling blood, will pounce on the opportunity. In this potential scenario, a quick drop to 1.18 could be on the cards next.
Overall, the current technical outlook on the EUR/USD looks bullish and so I would favour looking for bullish rather than bearish setups on this pair.