EUR/USD - At the mercy of risk sentiment, keep an eye on US inflation expectations

The retreat from Friday's high of 1.2092 in EUR/USD was extended to a low of 1.1948 yesterday as calm in the Korean Peninsula and the uptick in the Chinese PPI lifted the risky assets and higher yielding currencies like the US dollar. The currency pair clocked a low of 1.1946 in Asia.

Keep an eye on US inflation expectations

10-year breakeven inflation rate

• 10-year breakeven inflation rate is the difference between the yield on the Treasury Inflation Protected Securitie [TIPS] and the yield on the nominal US 10-year Treasury note.
• As of September 8, the breakeven rate stood at 1.81%.
• On Saturday, China reported a pick up in PPI [factory-gate prices] numbers. The pace of PPI expansion jumped from 5.5% in July to 6.3% in August.  The data show the economy is on a reflationary path.
• Note that a rise in Chinese PPI in July/August 2016 was followed by a rise in inflation expectations in the US and across the advanced world.
• On similar lines, the 10-year breakeven inflation could rise, in which case the USD stands to gain.

As for today, the focus remains on the broader market sentiment. US will report July JOLTS job openings. A better-than-expected could yield a steeper yield curve and a strong US dollar.

EUR/USD Technical Levels

The daily chart shows a bearish reversal confirmation [Friday's candle with a long upper shadow and a bearish follow through yesterday]. The drop seen yesterday was pretty much in line with the bearish bias in the options market on the CME.

The 10-DMA at 1.1934 could offer support, which if breached would open up downside towards 1.1898 [support offered by the trend line sloping upwards from the June 27 low and August 17 low]. The next major support is seen at 1.1823 [Aug 31 low].

On the higher side, a break above 1.1976 [5-DMA] would expose 1.20 [psychological level]. A daily close above the same would open doors for 1.21 handle.