EUR/USD: Bullish reversal remains elusive ahead of German GDP

• EUR/USD failed to confirm a bullish reversal with a close above 1.1153 on Monday.
• German GDP is expected to have contracted by 0.1% in the second quarter.

EUR/USD remains on the defensive, as the pair fell 0.34% on Monday, invalidating Friday’s bullish outside reversal candle.

If the pair had closed above 1.1153 (Friday’s high), a bullish reversal would have been confirmed, as discussed yesterday.

Yield differentials widened in the USD-positive manner

The bullish daily close remained elusive, possibly due to the widening of the yield differentials. Notably, the spread between the 10-year US and German government bond yield rose from 211 basis points to 221 basis points on Monday.

That said, the yield spread is down 25 basis points on a month-to-date basis and 60 basis points from the high of 280 basis points seen in November 2018.   Even so, the EUR/USD pair is trading flat-lined on a month-to-date basis and is down more than 200 pips from the level of 1.1318 seen in November 2018.

The data indicates the correlation between the EUR/USD pair and the yield differentials has broken down.

Focus on German GDP

The data due at 06:00 GMT is expected to show the economy contracted by 0.1% in the second quarter. The slowdown is already priced in. So, the EUR pair may not move if the data prints in line with estimates.

The common currency, however, may come under pressure, if the German GDP prints below estimates, strengthening the case for aggressive easing by the European Central Bank.

Apart from the data, the pair may also take cues from the action in China’s Yuan and political developments in Italy. In the American session, the focus would shift to the US consumer confidence data.

As of writing, the pair is sidelined near 1.11.

Technical levels