EUR/USD may correct but it may just be a bump in the road lower
Oct 18 (Reuters) -EUR/USD rallied into the weekend and the probability of a correction exists but longer-term bears will likely see rallies as opportunities to get short.
Friday's gains were likely driven by profit-taking into the weekend after the pair neared 1.0775/1.0800 support, which was the target of the recently completed double-top pattern.
The lift took place despite an increase in the dollar's yield advantage over the euro and China's Q3 GDP report showing growth remains below target. Both influences factored into EUR/USD's recent down trend.
German-U.S. 2-year yield spreads US2DE2=RR widened to levels not seen since July 1 while terminal rate spreads for the Fed SRAM26 and ECB FEIZ5 widened to levels not seen since late April and neared -147/-148bps support.
EUR/USD will likely struggle to rally while rate and yield differentials continue to move in the dollar's favor and China growth remains anemic.
Investors will focus on euro zone October PMI due Oct. 24. Estimates call for increases from September's results for the composite, manufacturing and services components.
Downside surprises will likely see euro zone yields and rates fall further and spreads widen as investors price in a higher probability the ECB cuts by 50bps, which currently stands near 30%.
EUR/USD may break below 1.0775/1.0800 then make a run towards April's monthly low.
For more click on FXBUZ
(Christopher Romano is a Reuters market analyst. The views expressed are his own)
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