EUR/USD rebounded after setting a 20-session low of 1.1753, providing a warning for bears, but downside risks still overshadow the bounce.
EUR/USD got a lift from a turn higher in equities ESv1 and oil CLc1 and rallied sharply on a Bloomberg report saying ECB policy makers were more confident about the euro zone's economic recovery. Click here
The rally approached key short-term resistance in the 1.1830/65 zone on EBS and then stalled.
Investors may be reluctant to rally EUR/USD further as inflation and options indicators suggest downside risks remain, with euro zone 5-year/5-year inflation linked swaps EUIL5YF5Y=R extending their slide after recently breaking below the Aug.
Risk reversals EUR1MRR=FN show vol premiums for EUR/USD calls over puts eroding quickly, with three-months close to flipping in favor of puts.
In technicals, monthly RSI implies bearish momentum, while daily charts show the right shoulder of a head and shoulders top could be forming.
The ECB meeting and U.S. CPI data are risks for EUR/USD and could lead to a major top nL1N2G50UZ.
For now EUR/USD should range trade until those risks pass.
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