EUR/USD fell on Friday, failing to sustain the previous session's upward momentum as it dropped away from the 10-day moving average and daily cloud base, but Fed expectations and yield spreads present risks shorts shouldn't ignore.
Despite the Fed being determined to fight inflation with aggressive tightening nL1N2Y12O3 investors have actually lowered their terminal rate projections since this week's extraordinary 75bps hike, with June 2023 Eurodollars EDM3 rallying to a 5-session high.
Should the rally extend downward pressure on the dollar is likely.
The trend of tightening German-U.S.
2-year yield spreads US2DE2=RR remains intact, which should diminish the dollar's yield advantage and support EUR/USD.
The ECB's planned tool to stem fragmentation between the euro zone's core and periphery bond markets nL1N2Y31WA drove a sharp tightening in German-Italian 10-year spreads DE10IT10=RR.
The tightening now has key support threatened and should it break more investor uncertainty will be removed and the euro could be buoyed.
If the latest dip remains shallow, shorts may throw in the towel and the rally off the June 15 low should resume.
A test of the daily cloud top and 1.0750/1.0800 zone would then be likely.
For more click on FXBUZ