EUR/USD: trade optimism and yuan rally favor upside in EUR

• Mnuchin’s comments have sparked trade optimism. Therefore, the EUR and risk assets will likely trade on the offensive against the greenback.
• Also supporting the bullish case in the EUR is the rally in the Chinese yuan – the fx market anchor.
• EUR/USD technical charts look constructive.

The EUR/USD pair could climb 1.16 if the equities remain bid and the Chinese yuan extends the ongoing rally.

The common currency picked up a bid at 1.1496 in Asia and rose to a high of 1.1528. Moreover, risk appetite improved after US Treasury Secretary Mnuchin said that China’s Vice Premier Liu may visit Washington this month for higher-level trade negotiations.

This is evident from the drop in the USD/CNH (offshore yuan) to 5.5-month low of 6.7517 and the rally in the Asian stocks to one-month highs.

Notably, the uptick in yuan usually bodes well for other majors as the Chinese currency is widely considered an anchor for the FX markets. Further, the haven demand for the treasuries and the US dollar drops during the risk-on rally.

The EUR/USD, therefore, could extend the gains seen in Asia if trade optimism continues to push both the CNY and the equity markets higher.

The technical charts are also aligned in favor of the bulls. The currency pair closed well above 1.15 on Wednesday, confirming an upside break of the two-month-long trading range of 1.12-1.15. The 5- and 10-day moving averages (MAs) are trending north and the 14-day RSI is hovering well above 50.00.

What’s more, risk reversals on the EUR, a gauge of calls to put, have nearly shed the bearish bias and could soon flip (turn positive) in favor of call options (bullish bets).

All-in-all, the path of least resistance is on the higher side. The only cause for concern is that gold’s rally has stalled near $1,300. Moreover, the yellow metal is known to lead the FX markets. As a result, gold’s inability to scale $1,300 could be considered a sign of impending corrective bounce in the US dollar.

EUR/USD Technical Levels