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EUR/USD - Bottom in place?

  • Friday's Doji indicates indecision/bearish exhaustion, but positive follow-through needed.
  • Risk reversals improve slightly.
  • Focus on US CPI.

Having posted a "doji" candle on Friday, the EUR/USD pair jumped to 1.2285 in Asia. A positive close today, preferably above 1.2287 (Friday's close) would confirm the bull doji reversal, meaning the pair has bottomed out at 1.2205 (Friday's low).

Also, risk reversals have improved somewhat. As of writing, the one-month 25 delta risk reversals gauge is seen at -0.975 vs. Friday's print of -1.05. The slight uptick indicates the premium claimed by the EUR puts (bearish bets) over the EUR calls (bullish bets) has dropped. Though encouraging, the risk reversals gauge is still well below the high of 0.55 seen in mid-January. So the bias on the EUR remains bearish.

Further, the chart-driven recovery could be short-lived if the US CPI (due this Wednesday) beats estimates.  A higher inflation in the US against the backdrop of fiscal expansion could send 10-year yield well above 3 percent, thus leading to another round of sell-off in the equities. In such a case, the EUR/USD could come fell the gravitational pull, although the common currency may remain well bid against other majors, courtesy of the Eurozone's current account surplus.

On the other hand, a weak CPI could weaken the will likely weigh over yields, helping EUR/USD claw back to its recent highs above 1.25.

EUR/USD Technical Levels

Momentum studies remain negative - 5DMA, 10DMA slope downwards to indicate a bearish setup. However, confirmation of bull doji reversal would open doors for 1.2402 (61.8% Fib R of recent drop). A violation there would shift attention to 1.2523 (recent high).

On the downside, a close below 1.2206 (Friday's doji candle low) could yield a drop to 1.2162 (38.2% Fib R of Nov-Jan rally), under which a major support is lined up at 1.2079 (50-day MA).

Author

Omkar Godbole

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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