EUR/USD: Not out of the woods yet

• Bull doji reversal confirmed, but the EUR is not out of the woods yet.
• Italian-German yield spread could widen as Italy falls to the forces of populism.
• The momentum studies are still biased bearish.

The EUR created a doji candle on May 9, signaling indecision or bearish exhaustion and posted gains yesterday, confirming a short-term bullish doji reversal.

Further, the 14-day relative strength index (RSI) is turning higher from the oversold territory. So an argument could be put forward that the EUR will likely see better times ahead.

However, Italian political risks could still play spoilsport. The most indebted member of the Eurozone has succumbed to the forces of nationalism and protectionism, according to Bloomberg. The country is set to form the populist government by Monday - a development which is unlikely to go down well with the bond markets.

Italian bond yields are already on the rise, representing investor concern regarding the political situation. the 10-year Italy-German yield spread widened to 138 basis points yesterday - highest since March and could rise even further in the EUR-negative manner as markets fear the debt situation could worsen under the new populist government.

Further, the momentum studies are still biased bearish. The 5-day moving average (MA), 10-day MA and 21-day MA are trending south, indicating a bearish setup. Thus, it is too early to call a bottom. That said, the weaker-than-expected US CPI release does seem to have weakened the bid tone around the greenback, hence the EUR/USD could move in a sideways manner.

EUR/USD Technical Levels

As of writing, the spot is trading at 1.1920. Resistance is seen at 1.1944 (10-day MA), 1.20 (psychological hurdle) and 1.2018 (200-day MA). Meanwhile, support is lined up at 1.1894 (5-day MA), 1.1822 (May 9 low), 1.1718 (Dec. 12 low).