Post-ECB trading range breakdown favors bearish traders, US CPI expected

  • EUR/USD plunged to nearly three-week lows after the ECB announced its decision on Thursday.
  • The absence of a clear signal for 50 bps disappointed investors and weighed on the common currency.
  • High US bond yields and risk aversion benefited the USD and contributed to the sell off.
  • The focus now shifts to the crucial US consumer inflation figures for May, due later this Friday.

The EUR/USD pair experienced a dramatic intraday reversal on Thursday and fell over 150 pips from the weekly high after the European Central Bank (ECB) announced its policy decision. As widely expected, the ECB has decided to leave its key interest rates unchanged and to end its long-term asset purchase program as of July 1, 2022. In the policy statement accompanying it, the central bank sent a clear signal that it would deliver its first rate hike since 2011 in July and left the door open for a potentially larger move in September. The common currency got a small boost in the wake of the hawkish outlook, although it struggled to take advantage of this move.

The ECB did not specify the size of the rate hike in September and said it will depend on inflation forecasts at that time. At the press conference following the meeting, ECB President Christine Lagarde said that if the September projections pegged inflation at 2.1% or higher for 2024, the rate hike would be higher than 25 basis points. September’s conditional rise and lack of further details disappointed some investors, which, in turn, was seen as a key factor that acted as a headwind for the common currency. Other than that, the resurgence in demand for US Dollars put strong downward pressure on the EUR/USD pair and contributed to the sharp intraday decline.

The forward guidance from the ECB confused investors as they doubted that major central banks could raise interest rates to curb inflation without hurting economic growth. This, in turn, led to the overnight sell-off in US equity markets, which, along with high US Treasury bond yields, provided a strong boost to the safe-haven greenback. In fact, the yield on the benchmark 10-year U.S. government bond held steady above the 3.0% threshold amid concerns about rising inflation, which could force the Fed to tighten its policy at a faster pace. Therefore, the focus now shifts to US consumer inflation figures for May, due later in early North America on Friday.

The crucial US CPI report could influence the extent and speed of the Fed’s monetary tightening path. This would play a key role in boosting demand for USD in the short term and provide further directional momentum to the EUR/USD pair. On key data risk, the USD was seen consolidating overnight gains to a three-week high, which in turn helped the pair gain positive traction. during the Asian session. The upside, however, looks limited as investors might prefer to wait on the sidelines and wait for a new catalyst before placing aggressive bets.

Technical outlook

From a technical perspective, the overnight slide confirmed a short-term bearish breakdown through a two-and-a-half-week-old trading range. A further drop below the previous monthly low around the 1.0625 region supports the outlook for further losses. Some follow-on selling below 1.0600 will reaffirm the negative bias and pull the EUR/USD towards the 1.0550-1.0545 area, or the 23.6% Fibonacci retracement level of the 1.1185 fall -1.0350. The downside trajectory could extend further towards the psychological 1.0500 bar, which if broken would expose the year-to-date low around the mid-1.3000s with intermediate support near the figure. round of 1.0400.

On the other hand, any meaningful recovery attempt now seems to face strong resistance near the 1.0670-1.0675 area, or the 38.2% Fibo. level. The said barrier now coincides with the 50-day SMA and should act as a pivot point. Sustained strength beyond that could trigger a short cover rally and carry the EUR/USD further above the 1.0700 mark, towards a test of the 1.0775-1.0780 supply zone, or 50% Fibo. level.

Garland K. Long