Is the EUR/USD rally coming up to the end

A dovish surprise from the European Central Bank could inflict a world of pain on euro bulls.

Betting on the shared currency has almost become a sure thing as overall dollar weakness and speculation that ECB President Mario Draghi could signal his intent to scale back monetary stimulus at Thursday’s policy meeting combined to push it to a 14-month high.

Even with Wednesday’s retracement versus the greenback ahead of the meeting, the euro is still up almost 10 percent this year. With that in mind, here are a few red flags for euro bulls.

Yield Differential

The euro has rallied against the dollar this year even as its yield spread -- the premium investors demand to own two-year U.S. Treasuries versus similar-maturity German government bonds -- stays within a modest range of 200 basis points.

Triple Top

If the currency comes under sustained pressure from a less-hawkish-than-expected ECB meeting, one technical indicator may portend a bearish outcome.
Over the past two years, the euro has peaked twice near current levels, suggesting the potential for a reversal of this year’s prolonged uptrend, known as a triple-top formation, if bears are vindicated.

Source: Bloomberg Pro Terminal

Jr Trader Ivan Ivanov

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