The Euro rallied a bit on Tuesday, as traders continue to see the German yields rally.
EUR/USD
The Euro was a bit noisy during the trading session on Tuesday, testing the 200-day EMA but failing. Now it looks like the 1.16 level will continue to be an area that's difficult to get beyond.
We do have a question to ask here and that is: are we still in a rectangle consolidating or are we starting to squeeze into a bit of a symmetrical triangle? I suspect maybe it's a little bit of both. You have a situation where yields in both countries continue to go higher, although the US yields have been somewhat calmer today than Germany. This is a market that is trying to figure out which way to go from a longer-term standpoint because there is a whole plethora of things that could cause problems here.
Higher interest rates in US typically mean a stronger US dollar and risk appetite being crushed. That is a well-known fact, but there are also things that we have to think about through the prism of second and third order of effects.
Macroeconomic and Geopolitical Risks Weighing on the Euro
For example, the energy situation in the European Union could be a bit of a disaster just waiting to happen. That obviously would be disastrous for the Europeans if there was a lack of energy. It would obviously put a big drag on their economy, more likely than not being a situation where the central bank could only offer limited help.
As things stand right now, I'm still pretty neutral although I do favor the dollar in general just because of the chaos going on and the higher rates in America. I think you're going to literally be trading this on a day-by-day basis, an hour-by-hour basis. As a general rule, to get US dollar strength I've been looking at the US 10-year yield at 4.3%, suggesting stronger dollar if we're above there and weaker dollar if we're below there.
We are above there but we have drifted a little bit during the day and that's part of what's going on here. But Germany's yields rose as well, so you also have to keep an eye on that. It's never just one thing and now it is basically driven by the comments of a couple people, some in Washington, some in Tehran, some in Tel Aviv, that are going to determine where risk appetite goes.
As things stand right now, I think we're still pretty neutral, but I do favor fading short-term rallies as the risk of US strikes on Iranian infrastructure overnight are definitely elevated.