EUR/USD - Focus on German yields & US wage growth, ECB Taper - Not a matter of choice

EUR/USD jumped to 1.1425 on Thursday and remained bid around the same level in Asian session today after the hawkish ECB minutes led to bond market sell-off across the Eurozone.

German 10-year yield rose to a 17-month high of 0.574%, while its US counterpart, also rose to 8-week high of 2.391%. The US-German 10-year yield spread, which stood at 1.892 two weeks ago, narrowed to 1.82 on Thursday.

A further widening of the yield spread could push EUR/USD into the resistance around 1.1465 (resistance offered by trend line coming from Aug 2015 high and Apr 2016 high).

Focus on US wage growth numbers

US average hourly earnings (due at 12:30 GMT) are seen rising 0.3% m/m in June, compared to 0.2% growth seen in May. A better-than-expected wage growth figures could provide much needed relief to the US dollar.

Super strong payrolls - A negative for USD?

The US economy has added 16.4 million jobs since 2010. The labor force participation rate remains at multi decade lows, while the unemployment rate is in the low 4%. The average monthly job gains have slowed down to 162K in 2017 from 250K in 2014. Thus, a NFP around 150K is a good number. A super strong payrolls number would mean there is still plenty slack left and rates need to remain low for further tightening in the labor market.

ECB Taper - Not a matter of choice

The ECB data released two days ago showed the central bank fell short of its target for purchases of German bonds under its quantitative-easing program for a third straight month in June. There is a shortage of Eurozone’s benchmark sovereign debt.

Bloomberg report says, “The ECB fell short of its implied buying target, as dictated by the capital key, by 304 million euros ($345 million) last month.”

The data clearly shows that the Taper is not a matter of choice anymore. It’s more of a technical issue and not entirely dependent on inflation trajectory. Thus, German bonds are likely to remain under pressure (yields on the rise). Dips in the yields (& EUR) could be short lived.

EUR/USD Technical Levels

A daily close above 1.1465 (trend line hurdle) would open doors for a sustained rise towards 1.1534 (Feb 2015 high) and 1.1616 (May 2016 high). On the downside, breach of support at 1.1366 (Aug 2016 high) could yield a pullback to 1.1283 (weekly 5-MA) and 1.1201 (weekly 10-MA).

The daily RSI is well short of overbought territory, suggesting scope for further gains in the pair. The monthly RSI has moved above 50.00 as well.