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Will The Fed Pull Back As ECB Pushes Forward on Bond To Lift EURUSD?

Will The Fed Pull Back As ECB Pushes Forward on Bond To Lift EURUSD?

Tyler Yell, CMT, Currency Strategist
  • Spot: $1.1585 per EUR
  • Entry Zone: Break and close above $1.1800 per EUR
  • Invalidation Point: $1.1600 per EUR (corrective pivot point)
  • Target 1: $1.2075 per EUR (> 1:1 Risk: Reward), 275 pips of reward sought, 1.375X Risk multiple
  • Target 2: $1.2555 per Euro (2018 top), 755 pips of reward sought, 3.7X Risk multiple

Emerging Market crises tend to go hand in hand with a stronger US Dollar. We’ve had a handful of crises of late, but surprisingly, the US Dollar has been held back and may continue to soften.

When the US Dollar peaked in late May, it traded at 94.60. Today, the US Dollar Index is trading at 94.85. At the same time, it’s worth considering that the Fed will not manually push the yield curve to invert, which they would do if they keep hiking as they said they would while the 10-year UST yield remains below 3%.

If the Fed does pull back on anticipated hikes that are already priced in, we could be looking a broad pullback in the US Dollar, which some think has already started. That being said, EUR/USD could have strength on the horizon if this plays out.

Looking at a weekly US Dollar chart, we appear to be moving into long-term resistance through the lens of Ichimoku Cloud, one of my favorite trend following indicators.

Long-Term Chart Shows US Dollar Coming Into Resistance

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Chart Source: Pro Real Time, an IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT

If Italian Bond Yields Fall, Capital Flow May Boost EUR

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Data Source: Bloomberg, Created by Jacob Schoenleb

Italian Bonds are important to watch as optimism abounds about the nation avoiding a budget crisis. If you look to the far right of the chart above you can see Italian Bond (BTP) yields drop, which as lifted EUR/USD from 1.13 to 1.17 (seen in orange.)

The absolute risk is that the ECB is set to make another cut in the bond purchase program, and given that they’ve already overpurchased Italian bonds. If the ECB spooks bond buyers and the yields jump back higher, then we’re likely to see a drop in EUR/USD, and the trade entry point of 1.1800 is unlikely to be reached.

However, if the yields continue to fall on favorable comments from Italy’s Finance Minister or the spread between the Italian 10 year yield and the German 10yr yield continue to narrow, traders should be on the look for further upside in EUR/USD price action.

EUR/USD Has Pulled Back, But A Channel Extreme May Show Value

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Chart Source: Pro Real Time, an IG Charting Package, IG UK Price Feed. Created by Tyler Yell, CMT

The chart above has two channels, first a Fibonacci Channel, which is drawn off the 2015/2017 lows and the August 2015 high. The Fib channel helps traders to see support or resistance as a trend moves through time. What the channel helps traders to see is that Fib Channel resistance may now be turning into support based on the low in late 2017 and recently when price pierced the channel top only to perform a morning star bullish reversal pattern. A break above $1.18 could be a signal that we’re now entering or turning into a new more bullish scene with a weaker USD.

The second channel is an Andrew's Pitchfork channel that is drawn off the closing low in late 2015 and key pivots in 2016 and 2017. Andrew’s Pitchfork does a good job of framing price action. Another thing that Andrew’s Pitchfork does is show you where there’s value within a move (typically in the lower quarter of a rising channel or an opportunity to take money off the table or at least not enter (typically in the upper quarter of a channel.)

If the price breaks above $1.18, it could be a signal that price is strongly rebounded, and we could soon be on our way back toward $1.2075 (a Fibonacci bullish target,) or the 2018 high at $1.2555.

We’ll see.

New to FX trading? No worries, we created this guide just for you.

---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

Communicate with Tyler and have your shout below by posting in the comments area. Feel free to include your market views as well.

Talk markets on twitter @ForexYell

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.