- EUR/USD tumbles to three-day lows near 1.0800.
- The Greenback picked up extra pace amidst higher yields.
- The ECB might not reduce its interest rates in June.
The US Dollar (USD) managed to extend its weekly recovery, making the risk complex vulnerable and prompting another test of the vicinity of the 1.0800 zone by EUR/USD on Wednesday.
The pair's second consecutive daily retracement occurred amidst the acceleration of the upside momentum in the Greenback and a significant rebound in US yields, driven by renewed speculation that the Federal Reserve (Fed) might maintain its restrictive stance longer than anticipated, a view supported by recent hawkish comments from Fed officials.
On the latter, the President of the Federal Reserve Bank of Minneapolis, Neel Kashkari, emphasized that the Fed should wait for significant progress on inflation before considering interest rate cuts. He went even further and argued that the Fed might hike rates in the event that disinflationary pressures stall.
According to the CME Group’s FedWatch Tool, the probability of lower interest rates by September has now decreased to nearly 40%, down from over 60% last week.
Regarding the European Central Bank (ECB), higher inflation figures in May poured cold water over expectations of a rate cut in June ahead of the release of the flash CPI for the broader Euroland later in the week.
Looking ahead, the relatively subdued economic fundamentals in the Eurozone, coupled with the resilience of the US economy, reinforce the ongoing narrative of Fed-ECB policy divergence and suggest a stronger Dollar in the long run. Given the rising likelihood of the ECB reducing rates before the Fed, the potential for further weakness in EUR/USD should be considered in the medium term.
EUR/USD daily chart
EUR/USD short-term technical outlook
Extra weakness might drag EUR/USD to the 200-day SMA of 1.0787 prior to the May low of 1.0649 (May 1), ahead of the 2024 bottom of 1.0601 (April 16) and the November 2023 low of 1.0516 (November 1). Once this zone is passed, the pair may go for the weekly low of 1.0495 (October 13, 2023), the 2023 low of 1.0448 (October 3), and the 1.0400 round milestone.
If bulls regain the upper hand, EUR/USD might revisit the May high of 1.0894 (May 16), ahead of the March top of 1.0981 (March 8) and the weekly peak of 1.0998 (January 11), all before hitting the important 1.1000 level.
So far, the 4-hour chart indicates the continuation of the downward bias. The next upward barrier is the 55-SMA at 1.0849 ahead of 1.0894, and 1.0942. Looking southward, 1.0807 comes first before 1.0766 and the 200-SMA at 1.0756. The relative strength index (RSI) dropped to about 32.
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