EUR/USD rallied above its 10-day moving average then struck a 13-month high Wednesday as investors appear more focused on inflation expectations and yield spreads which are helping to limit downside risks.
5-year/5-year inflation linked swaps USIL5YF5Y=R have fallen sharply from their April 14 peak.
Meanwhile, Euro zone inflation linked swaps EUIL5YF5Y=R are off as well, but not nearly as deeply.
Diverging inflation expectations could be suggesting that once the cut cycle kicks off, the Fed will be slashing rates more aggressively than the ECB.
2-year yield spreads US2DE2=RR, which EUR/USD is correlated with, are helping to underpin EUR/USD as well.
The spread is its tightest since late October 2021 as the dollar's yield advantage over euro erodes further.
As for the technicals, a new bullish signal has emerged which reinforces an already favorable setup.
EUR/USD initially traded lower Wednesday before rallying above Tuesday's high and striking the 13-month high which resulted in a bullish engulfing candle.
The daily RSI diverged on the 3-session low and is rising again which reinforces bull signals from a rising monthly RSI and April's monthly hammer candle.
That said, offers protecting a likely 1.1100 barrier are an impediment.
A break of the barrier brings 1.1235/75 into focus.
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