FX.co ★ The euro sees no barriers

Neither strong macro statistics in the United States nor the rise in U.S. Treasury yields, nor concerns about the Italian budget and the crisis in the Middle East have prevented the "bulls" on EUR/USD from continuing their counterattack. Speculators are gradually reassessing their positions on the euro, believing that many "bearish" factors are already priced into the regional currency's quotes.

The increase in U.S. retail sales by 0.7% and the core indicator by 0.6% in September became another pleasant surprise from the economy. Given that Americans' real expenditures are rising rapidly, positive GDP dynamics can be expected in the fourth quarter. The strength of the economy, together with massive issuances by the U.S. Treasury and the Federal Reserve's intention to keep the federal funds rate steady for an extended period, were the main drivers of the rally in bond yields and the USD index.

Dynamics of U.S. Treasury Bond Yields

However, much has changed on the cusp of October. Interest rates on 10-year bonds are returning to the area of 16-year highs, and the U.S. dollar is in no hurry to strengthen. It is reacting to oil dynamics, for which U.S. President Joe Biden's visit to Israel is seen as a sign of de-escalation of the Middle East conflict. By the way, the ECB is closely monitoring this situation. European Central Bank head Christine Lagarde stated that the central bank is keeping a close watch on the situation, and the Bank of France head, Francois Villeroy de Galhau, noted that the ECB is vigilant in this matter.

Undoubtedly, rising oil prices are a negative factor for the Eurozone, a region that imports energy resources. However, the involvement of Iran and other countries in military actions in the Middle East could drive Brent oil to $100–120 per barrel. In this regard, de-escalation of the armed conflict is bad news for black gold and good news for EUR/USD.

Positive news for the euro has also come from Italy, where Finance Minister Giancarlo Giorgetti stated that there are no red or yellow lines in the process of Italian bond yields exceeding rates on their German counterparts. In other words, the expansion of the differential, which in October twice exceeded 200 basis points, will not jeopardize the country's finances.

Dynamics of the Italian and German Bond Yield Differential

Before this, investors were alarmed by the words of Governing Council member Gabriel Makhlouf, who said that the yield spread dynamics kept the ECB on alert. The spread is considered the main indicator of political risk in Europe, and the central bank may intervene to calm investors.

Thus, the correction of EUR/USD continues thanks to signs of de-escalation of the armed conflict in the Middle East, associated with the decline in oil prices and optimistic news from Italy.

Technically, on the daily chart of the main currency pair, the "bulls" are trying to activate the 1-2-3 reversal pattern. To do this, they need to successfully breach the resistance levels at 1.059 and 1.063. Success in these activities will allow us to shift focus to long positions on EUR/USD.