EUR/USD: Bearish Momentum Increases Volatility

When a downtrend increases its vol, it tends to be a double-edged sword. On one hand, it allows an acceleration in profitability as the moves are more expansionary in nature. Prove of that is the breakout of the channel bottom-side during the last European morning. However, notice that the rebound has been equally vol and impulsive before liquidity dried up? Whenever we see this occurrence, it raises a red flag about a potential trend reversal conditioned to price action in agreement, which for now is not. The path of least resistance, judging the renewed strength in the DXY (magenta), from which the Euro/US Dollar pair accounts for 57% of the basket, it’s still too premature to anticipate a sudden change in trend, with 1.13 as the next clear target for sellers. The first indication that the market may technically start to show some cracks is by a retake of 1.1360 (horizontal resistance + descending channel trendline). The German vs US yield spread shows such a divergence from the actual price that is hard not to anticipate value in becoming a potential buyer once the sell-side campaign lands at 1.13 and level below. This is by far the widest divergence between the bond yield spread and the DXY/EURUSD we’ve seen for months.