EUR/USD inter-markets: time to fade the rally?

EUR/USD is trading in a narrow range at the beginning of the week, partly fading last Friday’s spike to fresh lows in the 1.12 neighbourhood amidst renewed sentiment towards the greenback and expected profit taking in light of the recent strong upside.

The positive performance of German yields is somewhat limiting the pair’s downside, while US yields keep sustaining the up move in the greenback.

Also volatility tracked by VIX is falling from daily highs, removing some tailwinds from the single currency, as opposed by the drop in Fed Funds future prices, signalling that the probability of a rate hike by the Fed at the December meeting has been trimmed to around 30% from last week’s 40% when measured by CME Group’s FedWatch tool.

All in all, it seems a cautious tone is poised to prevail in the very near term and in light of key releases in the US economy (PCE, ADP, NFP), leaving the initial target of a bullish attempt at Friday’s tops around 1.1200 ahead of the 1.1260 area, where sit the base of the 8-month rising channel and a retracement of the May-June down move. On the downside, a break below last week’s lows at 1.0950 would allow a potential visit to the 1.0900 neighbourhood.