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Forex: EUR/USD sets the 1.2810 level as an inflection point

FXstreet.com (Barcelona) - Probably against many people's expectations, EUR/USD has not fallen further below the 1.2750 mark, and instead, has printed a double low at that point, and now trades above the 1.2800 handle again. Last at 1.2830, finding resistance at previous weekly lows, the pair has been capped so far at yesterday's early NY trade highs 1.2840, jumping on the back of better than expected German retail sales figures for the month of February.

Most markets will be closed over Good Friday, including those in the USand Europe, being extended to Monday across the EU, drying up liquidity, and thus possibly increasing volatility. For later on schedule, US “Personal income and personal spending numbers are due for release, and given the rise in retail sales and increase in average hourly earnings, we look forward to stronger numbers that should be positive for the dollar, equities and overall risk appetite,” BK Asset Management managing director Kathy Lien pointed out.

“Traditionally, the EUR/USD has a strong and positive correlation with the S&P 500 but this correlation broke down completely in the past 2 months with the S&P 500 rising and the euro falling,” Kathy adds, expanding: “While we expect this correlation to resume eventually, we don't see it happening before Europe finally rids itself of tail risk caused by uncertainties such as like the Italian election and Cyprus once and for all,” she concludes.

For the next week ahead, many Central Bank meetings are awaited, including those in Australia, the UK, Japan, and of course, Europe, with the ECB meeting on Thursday April 04, when “The risk of rate cuts continues but we still seem not to see it this week,” say London based FX Research Team at TD Securities.

“But PMIs continue to disappoint and we see the risk of a rate cut as soon as May if the data does not quickly turn as the ECB‘s forecasts are looking too optimistic,” the Team notes, adding: “This creates a risk that they drop a hint in this regard at this meeting, but it will be a busy Q&A with questions on data, Cyprus, and Slovenia,” the analysts conclude.

While for the shorter term, from a technical perspective, according to Valeria Bednarik, Chief Analyst at Fxstreet.com: “the EUR/USD pair trades barely above 1.2800, with the hourly chart showing indicators losing momentum and approaching their midlines, after the pair found sellers in the 1.2840 area immediate resistance,” Valeria notes, adding: “In the 4 hours chart technical readings maintain the bearish tone, as indicators turn south below their midlines, and 20 SMA capped the upside around mentioned high.” She still believes “the downside continues to be favored, with a break below 1.2790 pointing to a test of 1.2730 price zone,” she suggests.

Meanwhile, USD index struggles to hold above the 83.00 handle, last at 82.90, off weekly and 8-month highs 83.30, while US 10 year note yields find support at the 1.83% level, near last 2-month lows, and around 50% retrace of latest up move from November last year from 1.55% lows to recent 2.06% highs. Strangely enough, latest up swing in bonds buying past three weeks, thus yields falling, has come hand in hand with record highs in US equity markets, diverging from its natural positive correlation.

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