EUR/USD - rally from April lows ends, futures Open Interest jumps, what’s next?

On Thursday, EUR/USD closed well below the support offered by the trend line sloping upwards from the April 17 low and May 11 low, thus marking an end of a two-month rally.

The spot fell to a low of 1.1132 on Thursday before closing at 1.1145 and traded flat around 1.1148 in the Asian session today. The preliminary data published by CME, shows a net uptick of 15,305 in the Euro FX futures Open Interest on Thursday. The rise in the OI could be fresh shorts initiated following the Fed's hawkish rate hike.

Focus on US-German yield spread and treasury yield curve

The US-German 10-year bond yield spread currently stands at 188 basis points. The markets are slowly coming to terms with the fact the Fed is no longer as data dependent as it used to be and intends to go ahead with the policy tightening in order to build firepower for the next round of the recession.

Hence, the Treasury yields may extend gains today, leading to widening of the US-German yield spread. The speculation that Fed may begin the process of balance sheet reduction (off loading treasury holdings) could yield a steeper yield curve, which too could strengthen the US dollar.

Eurozone CPI is seen falling 0.1% m/m

A bigger drop in the Eurozone May CPI would weigh over the common currency. The annualised core inflation growth is expected to have slowed to 0.9% from the previous month’s 1.2% rise.

Across the pond, we have housing data and Michigan consumer sentiment scheduled for release today. However, the focus will be on Dallas Fed President Kaplan’s speech. Kaplan is more likely to defend this week’s hawkish rate hike, given he has always been in favor of three rate hikes in 2017.

EUR/USD Technical Levels

Has the rally from April lows ended? - The daily chart shows repeated failure around 1.1268 (100% Fib expansion of Apr low - May 5 high - May 11 low) + bearish price RSI divergence followed by falling top formation + Wednesday’s doji candle and bearish follow through on Thursday followed by a break below critical support of 1.1166 (June 9 low). As noted above, the rising trend line has been breached as well. The price action suggests the Macron rally has ended.

The immediate support at 1.1116 (23.6% Fib R of 1.0569-1.1284), if breached, would open doors for 1.1075 (May 18 low) and 1.1011 (38.2% Fib R) - 1.10 (zero levels). On the other hand, a break above 1.1181 (rising trend line resistance) could yield a re-test of 1.1268 (May 23 high) and 1.1285 (June 2 high).