EUR/USD: Sell on Rallies Set to Yield Most Bang for Buck

The outlook in the pair has turned substantially more bearish as technicals and fundamentals align in favour of further sell-side campaigns. The rise in wage growth in the US above the 2.8% ceiling (held for the last 2y), coupled with a decent US NFP payrolls number of 201k was enough ammunition to see aggressive USD buying. The late Friday remarks by Trump that even further tariffs on China could be imposed led to re-ignite risk-off flows, adding fuel to the USD rocket.

The improved outlook for a more aggressive tightening cycle by the Fed, something the market might not have been prepared for, was well portrayed via the German vs US yield spread, falling to the lowest levels in Sept. At the same time, Italian vs German yield spreads came up further. We have a marked improvement in US fundamentals, accompanied by lower German vs US yield spreads and higher Italians, which should be seen, from a valuation perspective, as the perfect bearish storm to keep the rate under pressure.

What levels look most attractive to reinstate positions? Looking at the price action in early Monday, the compressive nature of the pair amid decreasing vol suggest that a possible rebound might be expected. However, as long as the yield spreads remain at such depressed levels, Friday's POC around 1.1570-1580 may act as a wall of offers too strong to overcome and keep the bounce fairly shallow. Should a breach of the area eventuate, a pristine area to consider engaging in sell-side action for what be a potentially much more appealing risk-reward is the range 1.16-1.1620, a juncture where the 50% fib retrac juxtaposes with a series of horizontal resistances as per the sequence of lows printed last Thur/Frid.