EUR/USD: Upside gathering steam as yield differentials roll over in favor of the EUR

• The EUR/USD closed above the key 38.2 percent Fib retracement yesterday, validating the falling wedge breakout witnessed on Nov. 16.
• The EUR is showing resilience to risk aversion and renewed US-China trade tensions, possibly due to favorable developments in the bond markets.

The EUR/USD is looking north amid risk aversion in the financial markets.

The common currency closed above 1.1445 – 38.2 percent Fibonacci retracement of 1.1815/1.1215 – validating the bullish view put forward by the falling wedge breakout on Friday. The tide has indeed turned in favor of the bulls.

Notably, the currency pair is capitalizing on the bullish breakout despite the renewed US-China trade tensions and the risk aversion in the global equity markets.

The EUR’s resilience to the risk aversion could be associated with a decline in the US-German yield differential. For instance, the 10-year spread between the 10-year US and German bonds fell to a one-month low of 270 basis points yesterday.

However, the spread between the 10-year Italian government bond yield and its German counterpart is closing at the recent high of 325 basis points. The common currency’s bullish action could come to a screeching halt if the spread breaks above recent highs, reflecting rising concerns about Italy’s fiscal health.

Apart from bond yields, the common currency could also respond to sound bites flowing in from the Eurozone finance ministers’ meeting scheduled today.

EUR/USD Technical Levels