Technically, the market has clearly found stubborn buyers sub 1.1250, with the last 4 different time intervals to break below failing to find any acceptance. What was initially a compressed 1.1250–1.13 range (yellow box) is now expanding into a potentially wider 1.1250–1.1350 range, If the Euro prints gains above 1.13 and can consolidate above, that will be the very first time in February that the pair is finally showing signs of a bullish structure of higher highs in the hourly in February. However, to gain further conviction on the technical outlook, the swing high of 1.1350 should be re-taken or else we run the risk of simply expanding the range into a 1c wide as mentioned.
From an intermarket flows (IMF) perspective, I will reiterate that trading the pair has been an extremely difficult exercise to pinpoint any external correlated asset acting as the driver. My hypothesis had been that the slower economic growth in the EZ was the main narrative the market latched on to drive the pair lower, that’s why as reference the German 10y acted as a fairly accurate leading indicator to gauge future market direction.
According to the 5-day correlation coefficient, the market appears to be clinging back to the old German-US yield spread as the #1 gauge for flows. If that’s the case, while evidence of bullish technical cracks in the DE-US YS 5y is evident, by the close of business in NY there is not yet a case to be made for a much higher exchange rate judging by both the microflows and the macrostructure (25 & 125-HMA respectively). Amid this backdrop, as long as the microflows in the yield spread stay predominantly down, I’d argue that any test of 1.1350 is still seen as a selling opportunity.
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