The raising of Ireland’s credit rating to investment grade on Friday evening has seen Irish bonds advance for the fourth day, with ten-year yields falling as low as 3.26%. Overall, the peripheral countries appear to be benefiting from this vote of confidence in the Irish recovery story.
As a result, the euro is enjoying a brief respite from last week’s sell-off. The 1.35 level is providing intraday support and bid action at this psychological level, sending EUR/USD northwards by 50 basis points.
Support turns to resistance
Given the way that the 100-day moving average was so supportive last week, one can expect that the tables will now turn and the 1.3567 level will probably be something of a barrier to upside from here.
Monthly German PPI data missed expectations slightly, achieving a rise of 0.1% versus the consensus of 0.2%. A leading indicator of consumer prices, the medium-term fundamentals would suggest that, should any additional data releases point to a prolonged state of disinflation in the eurozone, we may well see some additional liquidity pumped into the system.
Bias for euro downside
All in all, we may be looking at additional euro declines – particularly if the market starts to price this scenario into the trade. This supposition is supported by the fact that we saw a double-top formation confirmed on 2 January, and by the test at 1.37 on 14 January. The price action on this day was a lovely little doji followed by a bearish candle.
This, in my opinion, puts the bias to the downside for the euro. I’m a seller of the rallies, and I have a target now at the 200-day moving average around 1.3350. A break and close below (on a daily basis) 1.3486 would set this in motion.
The alternative scenario, where the euro succeeds in retaking the 1.3570 levels, could see the pair eying the 50-day moving average and the pivotal 1.3620 level might be tested.