EUR/USD has reversed last week’s post-ECB sell-off, whats next?

• EUR/USD’s found-day winning streak has erased losses seen yesterday.  
• The relief rally could be short-lived, as Treasury yields are again rising.  
• Brexit optimism and sustained risk-on, if any, could bode well for the USD in the longer-run.  

EUR/USD’s drop to 21-month lows below 1.12 has been reversed, but the relief could be short-lived, as the US 10-year treasury yield has bounced up from three-month lows seen earlier this week.  

The European Central Bank (ECB) turned dovish last Thursday, pushing the shared currency lower across the board. The EUR/USD pair fell more than 140 pips to 1.1176, confirming a downside break of the three-month trading range of 1.12-1.15.  

The follow-through to range breakdown, however, has been bullish. The currency pair put on a good show for the fourth straight day on Wednesday, closing well above 1.13, erasing the 140-pip drop to 1.1176 seen last Thursday.  

While the bulls have survived for now. the relief could be short-lived, as the US 10-year treasury yield has recovered from a three-month low of 2.59 percent hit earlier this week to 2.63 percent.  

Further, the two-year US-German (DE) government bond yield spread seems to have found a bottom around 300 basis points (January lows).  

So, EUR/USD’s recovery rally may run out of steam ahead of the weekend. As of writing, the pair is reporting marginal losses at 1.1322 with hourly RSI rolling over from overbought territory.  

A drop below 1.13 could be seen if the Eurozone’s final CPI reading for February, due for release at 07:00 GMT, prints below preliminary estimates released earlier this month, validating ECB’s recent decision to push rate hikes out to 2020.

Apart from the Eurozone inflation data, the pair will also take cues from the US weekly jobless claims, export and import price indices and housing data.  

Any rise in Sterling due to Brexit optimism may also put a bid under EUR/USD. That said, in the longer-term, the risk-on is more likely to favor the high-yielding dollar.  

Technical Levels