EUR/USD - Renewed call demand as Catalan fears ease, yield differential favors USD

The EUR/USD rose an eight-day high of 1.1828 in early Asia after premier Carles Puigdemont pulled back from the brink of a full-blown unilateral declaration of independence for Catalonia and opened doors for last minute negotiations.

Risk reversals rise

• The one-month 25-delta risk reversals rose to 0.35 on Tuesday; the highest level since July 24.
• The uptick in risk reversals indicates renewed call demand.

However, the bond yield differential says the relief rally seen in the EUR/USD pair on the easing of Catalan fears is likely to be short lived.

US-German 10-year yield spread

The spread or the difference between the US 10-year Treasury yield and the German 10-year Bund yield currently stands at 191 basis points; the highest level since July 13. The chart above also shows a major bullish trend reversal for the spread (breach of the falling trend line).

Looking ahead - The data docket is light in Europe, hence the focus will be on the news flow out of Spain. Fears that Trump's tax reform plan could be hitting a major speed bump could limit the gains in the USD. In the NY session, Fed minutes are likely to shed more light on the depth of backing for the December rate hike.

EUR/USD Technical Levels

The currency pair was last seen trading around 1.1802. The decline from the high of 1.1828 is largely in line with the uptick in the yield differential. A break above 1.1831 (38.2% Fib R of 1.2092-1.1669) would open up upside towards 1.1881 (50% Fib R of 1.2092-1.1669) and 1.1910 (Aug 2 high).

On the other hand, failure to hold above 1.18 could yield a drop to 1.1756 (4-hour 50-MA), under which a major support is seen directly at 1.1669 (Oct 6 low).