EURUSD: Further gains possible but the outlook remains fragile

EURUSD managed to hold short term support this morning at 1.3535 – the bottom of the ascending channel on the hourly chart. This comes after a rare positive surprise for Spain’s labour market. Unemployment fell by 2.5k, better than the 50k increase expected and the largest drop since July. This has been followed by a bullish crossover in the hourly MACD, which suggests the short term momentum could be higher.

So where could this cross go next? There is a cluster of moving average resistance between 1.3566 (50-day sma) and 1.3585 (100-hr sma). If it can get above these near term barriers then the channel top at 1.3650 comes back into view. Above here opens the way to 1.3700, the highest level since 31st Oct and a key psychological barrier.

But, we are wary about EUR in the long term as EURUSD has diverged from the spread between German and UK yields. As US economic data shows signs of improvement the chance of a Fed taper in the next couple of months may start to increase, thus life above the top of the hourly channel at 1.3650 could be a step too far for even the most hardy EUR bulls.

Watch Eurozone PPI data later today as a weak number could drive concerns that the ECB may need to loosen again to ward off the threat of deflation, which may weigh on EURUSD