EUR/USD - Bond yield spread reverses course, is a trend reversal on the cards?

EUR/USD pair fell to a four-day low of 1.1728 on Friday after the US July non-farm payrolls number bettered estimate and wage growth ticked higher as expected.

The spread or the difference between the US 10-year Treasury yield and the German 10-year Bund yield increased to 179 basis points from 177 basis points.

• The chart above shows a bullish break of the falling channel on the US-German 10-yr yield spread chart. It indicates a scope for further widening of the yield spread in favor of the USD.

Options activity shows bearish move could gather pace below 1.16

The EUR/USD could have topped out at the last week’s high of 1.1910 going by the yield spread; however, the options data indicate the trend reversal is likely only below 1.16 handle.

This is because the max OI buildup in Put options in the September expiry contract is seen at a strike price of 1.16, 1.14, 1.12 and 1.11. A break below 1.16 would force the Put writers to unwind their positions leading to a bigger drop in the spot.

The data docket is thinner today; hence the focus remains on the yield spread and the broader market sentiment. The EUR has been treated as a risk currency this year, thus a potential risk-off could weigh over the common currency.

EUR/USD Technical Levels                                

Last week’s candle carries a long upper shadow, which signals bull market exhaustion above the weekly 200-MA level of 1.1777. The currency pair neared 1.18 handle in Asia.

A break above 1.1819 [5-DMA] would open up upside towards 1.1869 [monthly 50-MA] and 1.1910 [last week’s high]. On the downside, breach of support at 1.1770 [Asian session low] could yield a pullback to 1.1663 [weekly 100-MA] and 1.1613 [July 26 low].