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- EUR/USD plunged to a near three-week low after the ECB announced its decision on Thursday.
- The lack of a clear signal for 50 bps disappointed investors and weighed on the shared currency.
- Elevated US bond yields, the risk-off mood benefitted the USD and contributed to the selling.
- The focus now shifts to the crucial US consumer inflation figures for May, due later this Friday.
The EUR/USD pair witnessed a dramatic intraday turnaround on Thursday and tumbled over 150 pips from the weekly high after the European Central Bank (ECB) announced its policy decision. As was widely expected, the ECB decided to leave key interest rates unchanged and end its long-running asset purchase program as of July 1, 2022. In the accompanying policy statement, 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 shared currency did get a minor lift in the wake of the hawkish outlook, though it struggled to capitalize on the move.
The ECB failed to specify the size of the rate hike in September and said that it would be dependent on the inflation forecasts at that time. In the post-meeting press conference, ECB President Christine Lagarde said that if September projections put 2024 inflation at 2.1% or higher, the rate hike would be bigger than 25 bps. The conditional jumbo hike in September and the lack of additional details disappointed some investors, which, in turn, was seen as a key factor that acted as a headwind for the common currency. Apart from this, resurgent US dollar demand exerted heavy downward pressure on the EUR/USD pair and contributed to the steep intraday decline.
The ECB's forward guidance unnerved investors amid doubts that major central banks can hike interest rates to curb inflation without impacting economic growth. This, in turn, led to the overnight selloff in the US equity markets, which, along with elevated US Treasury bond yields, provided a strong boost to the safe-haven greenback. In fact, the yield on the benchmark 10-year US government bond held steady above the 3.0% threshold amid concerns about rising inflation, which might force the Fed to tighten its policy at a faster pace. Hence, the focus now shifts to the US consumer inflation figures for May, due later during the early North American on Friday.
The crucial US CPI report could influence the scale and speed of the Fed's monetary tightening path. This would play a key role in driving the near-term USD demand and provide a fresh directional impetus to the EUR/USD pair. Heading into the key data risk, the USD was seen consolidating the overnight gains to a three-week peak, which, in turn, assisted the pair in gaining some positive traction during the Asian session. The upside, however, seems limited as investors might prefer to wait on the sidelines and wait for a fresh catalyst before placing aggressive bets.
Technical outlook
From a technical perspective, the overnight slide confirmed a near-term bearish breakdown through a two-and-half-week-old trading range. A subsequent fall below the previous monthly low, around the 1.0625 region, supports prospects for further losses. Some follow-through selling below the 1.0600 mark will reaffirm the negative bias and drag the EUR/USD pair towards the 1.0550-1.0545 area, or the 23.6% Fibonacci retracement level of the 1.1185-1.0350 fall. The downward trajectory could further get extended towards the 1.0500 psychological mark, which if broken would expose the YTD low, around mid-1.3000s with some intermediate support near the 1.0400 round figure.
On the flip side, any meaningful recovery attempt now seems to confront stiff 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 pivotal point. Sustained strength beyond might trigger a short-covering rally and lift the EUR/USD pair further beyond the 1.0700 mark, towards testing the 1.0775-1.0780 supply zone, or the 50% Fibo. level.
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