EUR/USD surged to its highest in nearly two years, setting up a potential test of a key Fibonacci retracement and late-2018 monthly highs as the euro's post-EU summit allure persisted and a potentially gloomy Fed meeting loomed.
Though safe-haven buying buoyed the yen on U.S.-Sino tensions nL3N2EY0JT, EUR/JPY held firm just below its July monthly high, while EUR/CHF cleared resistance near 1.0820 and EUR/GBP broke 0.9135/45 resistance.
Inflation and option influences added to euro support, with euro zone 5-year/5-year inflation-linked swaps EUIL5YF5Y=R hitting a four-month high.
After a brief pause in their rallies EUR/USD risk reversals EUR1MRR=FN showed vol premiums for calls over puts increased.
Some options investors expect EUR/USD to trade much higher nL2N2EY08J.
Dollar-specific factors also supported the EUR/USD outlook.
With a downbeat tone expected from the Fed nL2N2EY09B, fed funds futures FFQ1 showed investors still expected rates to remain near zero and turn slightly negative in early-H2 2021, keeping the dollar's =USD downward trajectory and bearish technical signals intact.
With EUR/USD bulls' confidence running high, a test of the 61.8% Fibo of 1.2556-1.0636 as well as September and June 2018 monthly highs seem likely.
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