EUR/USD defends head and shoulders neckline ahead of Yellen speech

EUR/USD was offered at the confluence of 5-DMA and 10-DMA on Monday after the German elections revealed a sharp rise in support for the far-right AfD party. Merkel's weak victory and heightened tensions in the Korean Peninsula did not help the matters either.

The spot dropped to an intraday low of 1.1832 and closed at 1.1848 [head and shoulders neckline level]. The minor recovery from the intraday low could be attributed to the fact that Fed policymakers stand divided on the outlook for inflation and interest rates.

Both New York Federal Reserve Bank President William Dudley and Chicago Fed President Charles Evans said they believe the US economy's fundamentals are sound, and both said they support gradual rate hikes ahead. Dudley reinforced Fed Chair Janet Yellen's confident tone, while Evans sounded much less certain.

Focus on ECB's Praet and Fed's Yellen & Co.

• ECB Chief Economist Peter Praet chairing Jean Monnet Lecture, “Good Pension Design” at Second ECB Annual Research Conference organized by the ECB in Frankfurt, Germany - 1200 GMT.
• Federal Reserve Bank of Cleveland President Loretta Mester moderates a “global outlook” panel at the 59th National Association for Business Economics annual meeting, which will debate collective challenges under the theme “Prospects for Growth: Reassessing the Fundamentals” – 1330 GMT.
• Federal Reserve Board Governor Lael Brainard speaks on “Labor Market Disparities” before the Federal Reserve Board Conference, “Disparities in the Labor Market: What are we Missing?” -1430 GMT
• Federal Reserve Chair Janet Yellen speaks at a luncheon before the National Association for Business Economics 59th Annual Meeting, themed “Prospects for Growth: Reassessing the Fundamentals” – 1645 GMT

ECB's Praet is likely to reiterate that " Substantial monetary stimulus is still needed to bring inflation in the euro zone back to the European Central Bank’s target of almost 2 percent".

Meanwhile, the Fed policymakers are likely to sound like reluctant hawks. The message from Fed chair Yellen is likely to be the same as last week. At the end of the day, it is Yellen's view that matters most. The American dollar may catch another bid wave on December rate hike talk and balance sheet taper.

US-German 10-year spread

The bullish symmetrical breakout on the chart above suggests the spread could widen in favor of the US dollar.

EUR/USD Technical Levels

The spot traded around 1.1860 in Asia. The 14-day RSI has dipped below 50.00 [bearish]. This, coupled with a drop below the head and shoulders neckline support of 1.1848 would signal the pair has topped out at 1.2092 [Sep 8 high].

On the downside, the upward sloping 50-MA of 1.1832 is likely to offer support, which, if breached, shall open up downside towards 1.1689 [Aug 9 low] and 1.1662 [Aug 17 low].

On the higher side, breach of resistance at 1.1861 [Sep 20 low[ would open doors for 1.1919 [5-DMA + 10-DMA] and 1.1980 [Sep 1 high].