EUR/USD - Yield differential saved the day for EUR, focus on EZ & US data

The EUR/USD dropped to an intraday low of 1.1926 on Tuesday before rising to a high of 1.1993 in Asia.

Tuesday's long-tailed candle indicates dip demand and was backed by the narrowing of the bond yield spread. The US-German 10-year yield spread currently stands at 1.759% vs. Monday's print of 1.792%.

Daily chart - Yield spread

• The declining trend line was breached in early August, but the follow through ran out of steam at 184 basis points [bps] on August 15.
• The spread could narrow sharply if the support at 173 bps is breached.

Key things to watch out for-

US PPI due at 12:30 GMT - The US economy is chugging along pretty well, except for the stubbornly weak inflation, which is hurting the USD. The PPI is expected to improve to 0.3% on Tuesday. A better-than-expected US data could push the treasury yields higher. The widening of the yield spread could weigh over the EUR/USD.

Eurozone data - Kathy Lein from BK Asset Management says, " Eurozone quarterly employment and German final CPI numbers are due for release tomorrow - these reports aren't exceptionally market moving so the euro should continue to take its cue from yields and the market's appetite for US dollars."

EUR/USD Technical Outlook

Stepehn Innes says, "in the absence of any Euro particular set of drivers and lieu of the current dollar correction, the shooting star reversal is not all that surprising.But despite the sell off from massively overbought levels above 1.2000 the Euro bulls are not giving up the game quickly and remain firm buyers on dips.

FXStreet Chief Analyst Valeria Benarik says, " in the 4 hours chart, the pair is developing below a marginally bearish 20 SMA, whilst technical indicators are recovering firmly from oversold territory, still below their mid-lines. As long as the price holds above 1.1910, the downward potential will be limited, yet below it, the pair could extend its decline down to a strong static support around 1.1870, while beyond this last, there's scope for an extension down to 1.1822, last week low. The pair would need to at least surpass Tuesday´s high of 1.1977 to gain some upward traction, but bulls won't come back in force unless the pair extends beyond 1.2030."