EUR/USD rallied to a 3-day high on upbeat risk on Friday, taking a step closer to completing an inverse head-and-shoulders bottom, but bulls could use some help from inflation and option influences.
The EUR/USD gains were driven by broad-based dollar weakness and the faster rise in German yields over U.S. yield rises.
Technicals helped, with the 10-day moving average crossing above the 21-DMA.
Daily RSI implied growing bullish momentum and a monthly long-legged doji candle formed for February.
However, euro zone inflation expectations could be tempering EUR/USD bulls.
The 5-year/5-year inflation linked swap EUIL5YF5Y=R has been trending lower since peaking on Feb.
Options also indicate EUR/USD upside could be difficult.
Risk reversals EUR1MRR=FN indicate vol premiums in the 1-week to 3-month tenors are near neutral, which suggests options investors lack conviction in either direction.
A turn higher for inflation expectations and vol premiums could give EUR/USD another boost higher and drive completion of the head and shoulders pattern.
The head and shoulders neckline currently sits at 1.2166, which is just above the 55-DMA and just below the Feb.
16 daily high of 1.21695 on EBS daily high.
Completion of the head and shoulders would suggest EUR/USD could rally toward January's 1.2149 high or possibly beyond.
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