A weaker EUR/USD was the main event for FX markets today after this pair tested below key support at 1.3638 – the 200-day sma. Weaker German confidence data triggered the sell-off; however, sentiment has been negative on the EUR since the ECB meeting earlier this month. Expectations are growing that the ECB will take some sort of action at its June meeting; however, the meeting may be too far away to get us much below this level?
Firstly, there is a risk that the ECB could disappoint expectations. The market seems to think that some action by the ECB is a done deal, but not all members have been enthusiastic, including the powerful head of the Bundesbank, Jens Weidmann. Secondly, 2 weeks is a long time in the FX market, and the weaker EUR theme could lose steam between now and then.
The Dollar Resurgence
So, while we think that potential action by the ECB is not enough to sustain EUR weakness in the medium-term, a broad strengthening of the USD could weigh on EURUSD in the coming weeks. The dollar index has surged in the last few sessions and is now testing its own 200-day sma at 80.39. A decisive break above this level could open the way to highs of the year so far at 81.38.
The Technical View:
Thursday’s daily close below key support at 1.3672, the April low, was the initial bearish development for this pair. A weekly close below the 200-day sma at 1.3638 would be a medium-term negative development. However, we are aware of two things that could limit the downside:
1, The daily and hourly MACD’s are either in, or close to, overbought territory, which could limit selling pressure in the short-term as this pair looks stretched to the downside.
2, The EU election results – if the anti-euro parties don’t do as well as expected, particularly in Greece, then we could see a mini-relief rally.
Overall, in the longer term we remain bearish for EUR/USD, largely because we anticipate decisive action at the next ECB meeting. However, between now and then, I am less bearish and would not be surprised if we saw a reversal ahead of 1.3600 and a mini-pullback. If we do get below 1.3600 then watch 1.3562 – the February 12th low, which would be the next major level of support.
If we are correct, and there is the potential for a mini-rally ahead of the next ECB meeting, key resistance lies at 1.3772 - the 38.2% Fib retracement of the latest sell off.
Figure 1: 