EUR/USD has flashed a warning sign in the form of ‘Hanging Man’ candlestick pattern that the bulls might be losing control. The pair dropped to a low of 1.1204 on Wednesday as techies took note of the bearish RSI divergence, although by the day’s end, the spot had trimmed losses and closed at 1.1256 levels.
Hanging Man is often referred as a bearish reversal pattern; however, the reversal is confirmed only if the next candle is red. The spot is largely at the mercy of the ECB rate decision and Draghi’s comments on inflation, economy and ultra easy monetary policy.
Hawkish risk underpriced
As per Bloomberg report, the money markets are under pricing the risk that Mario Draghi will tweak the policy language to indicate a potential shift away from the ultra easy monetary policy. The step towards normalization will mostly come in the form of an acknowledgment of the Eurozone’s economic strength. The ECB might drop words like – downside risks to economy and scope for more easing – to suggest the policy shift.
But inflation remains weak…
There is risk that Draghi refrains from tweaking the policy as inflation remains weak. Eurozone price pressures slowed to 1.4% in May and the core rate dropped to 0.9%.
More importantly, the 5year, 5year forward rate – a key forward looking indicator of inflation in the Eurozone – has dropped more than 20 bps since the start of the year. It currently stands at around 1.6%. So why would the ECB/Draghi be in a hurry to switch gears?
The Hanging Man pattern could be followed by a bearish confirmation today if Draghi takes note of weak inflation and maintains the easing bias. The ECB rate decision is due to 11:45 GMT, while a Draghi’s press conference is scheduled at 12:30 GMT.
The spot was last seen trading around 1.1260 levels. The bearish price RSI divergence and a Hanging Man candlestick pattern signal the rally from the April low of 1.0569 may have run out of steam.
A break above 1.1285 (June 2 high) would open up upside towards 1.1366 (Aug 2016 high). The next major resistance is seen around 1.1489 (trend line sloping downwards from Aug 2015 high and May 2016 high).
On the downside, support is seen at 1.1204 (previous day’s low). A daily close below the same would add credence to the bearish RSI divergence and Hanging Man pattern and would open doors for 1.1109 (May 30 low + resistance offered by the trend line drawn from Apr 17 low and May 11 low) and 1.1021 (May 8 high).