EUR/USD fades spike to 3-year high after inside day doji candle

• EUR fades spike to a fresh 3-year high of 1.2323.
• Inside day doji candle indicates bull market exhaustion/indecision in the marketplace.
• German political uncertainty, dovish talk from the ECB could hurt the EUR.

The EUR/USD rose to a fresh three-year high of 1.2323 a few minutes ago only to fall back below 1.23 levels, indicating the overbought technical conditions are likely coming into play.

The failure to hold above 1.23 levels adds credence to bull market exhaustion shown by yesterdays inside day doji candle. A close today below 1.2195 would confirm bearish doji/bearish inside day candle reversal and could yield a deeper pullback in the EUR/USD in the short-term.

A 100-pip drop from the current level of 1.2290 cannot be ruled out, given the European Central Bank is unlikely to ditch a pledge to keep buying bonds at next week's meeting. Three sources close to the matter told Reuters that rate-setters need more time to assess the Euro exchange rate and an outlook for the economy. Also, In an interview published late on Tuesday, Bundesbank head and ECB's Governing Council member, Jens Weidmann, seemed to rule out a rate hike this year.

Further, the uncertainty surrounding the German Chancellor Merkel's ability to form a coalition government could also become a reason for the technical pullback in EUR/USD.

That said, the dips could be short-lived unless there is a sudden and significant rise in the 10-year US-German bond yield spread.

EUR/USD Technical Levels

A move above 1.2323 (Asian session high, 3-year high) would open doors in 1.2377 (161.8% Fib extension of the November low-high-December low) and 1.24 levels (zero levels). On the downside, a break below 1.2254 (session low) could yield pullback 1.2209 (5-day MA) and 1.2195 (previous day's low).