EUR/USD: In Distribution Phase, Resolution Past 1610-1660 Needed

On the back of an impulsive recovery on Sept 5th, the value of the exchange rate has adjusted higher, with the market finding equilibrium above 1.16 as the pressure on Italian bonds recently cames off a few notches and the German vs US yield spreads, most notably the short-end, edge higher this week. Today's resolution of the range will come as a function of the removal of liquidity seen post US NFP, with the purple areas drawn the most evident areas of support/resistance.

The resilience by the Euro is a reflection of the tentatively more positive tone in the Brexit negotiations, with the market still giving the benefit of the doubt to the latest headlines that Germany and the UK are said to drop key demands to facilitate a post-Brexit transition. Note, positive data surprises in favor of Europe or mere demerits of a weaker USD as the import of capital into the USD slows down, also weigh on a higher exchange rate.

As noted on Thursday, the pair is detaching itself from a proxy for risk, with capital entering surplus currencies like the EUR another reason to think the bid tone may continue even if EM selling continues. This week, we've already seen signs of it, with the continued deterioration of the risk-weighted index (black line) not manifested in a lower rate but the opposite.

Overall, as long as the US NFP is not an outlier and remains within 1 standard deviation of its projections (between 180-200k), the pair may continue to see decent buying interest as long as the correlated assets (Italy, yield spreads) anchor the Euro.