EUR/USD: Poor quality downcycle as descending trendline broken

Cycles & Levels: Be aware the weekly cycle has been bullish ever since mid last year when acceptance was found above 1.14/1.15. The price is now all the way back re-testing the previous resistance-turned-support, which coincides with the 50% fib retracement. Drilling down into a lower timeframe, the down-cycle formation on the daily keeps the bias bearish even if short-term there are tentative signs of a rebound as the price rejects a key area of support circa 1.1350 (blue line).With regards to the hourly, the first cracks on the well-established downtrend are starting to occur after the descending trendline was violated last Friday. Besides, the latest buy-side flows have been impulsive in nature on the way up vs the more corrective two-way business on the way down. When this occurs, one should be on guard for an upward continuation.

Correlations & Volumes: The German vs Italian 10-year yield spread continues to recover, breaking above its most recent peaks (magenta line), with an analogous picture is seen in the German vs US 5-year yield spread (blue line). The divergence between price (lower) and correlations (higher) argues for a potential recovery up to the next area of daily resistance circa 1.1450. This view is also anchored by the continuous decreasing tick volume on the way down. A breakout of the recent lows would invalidate this thesis, while a re-take of Monday’s POC at 1.1390 reinforces the bullish viewfor higher valuations heading into mid-week.

Drivers & Risk events:The lack of an immediate positive resolution on the Brexit saga nor the Italian budget have damaged the outlook for the Euro, while broad-based USD strength added further downside pressure. Be aware that in the next 24h the following events have the capacity to create notable volatility: German preliminary CPI, EZ preliminary GDP, US CB consumer confidence.