EUR/USD: Absorption Of Draghi's-Led Spike, Technicals Bullish

The pair exhibits a price absorption after Monday's Draghi-led spike faded in response to renewed concerns over the Italian budget deficit outlook, which led to an increase in the Italian 10-yr bond yield. Monday's price action was characterized by low tick volume but if we are to analyze the sequence of the last 5 trading days, the volume activity of increasing volume on buy-side days followed by decreasing volume on down days just as a key resistance was pierced still suggests a bullish outlook.

However, in the coming days, the Italian bond yield is set to be a more accurate barometer to measure the risk sentiment in the pair. The fears orbit around the Italians over-blowing EU’s budget deficit limits. The range that appears to be the make or break for the market is 3%, with any deficit larger to translate into a higher Italian premium and a lower Euro. Even above 2% may see some jitters.

Any upside potential, nonetheless, should be contained above the 1.18 judging by the major divergence that exists between the German and the US 10-yr bond yield spread. Only a break and hold below the origin of the demand candle from last Thursday at 1.1650-50 will undermine the bullish bias, which considering the improved outlook in inflation by Draghi on Monday, makes the prospects less likely.

Trade safe!