On the technical charts, the EUR/USD pair looks toppy, as a slightly less dovish forward guidance by the ECB ensured a weak follow through to Wednesday’s ‘Hanging Man’ candlestick pattern.
The EUR/USD pair clocked a high of 1.1237 in early Asia before sharp losses in the GBP/USD and the heightened UK election uncertainty dragged the pair lower to 1.1179 levels.
ECB took note of weak inflation
The central bank did drop the reference to lower rates in its forward guidance, but took note of the weak Eurozone inflation numbers. Draghi reiterated readiness to cut rates/do more if required. Moreover, the central bank’s decision to drop the reference to lower rates does not necessarily mean the interest rates would go up in the near future.
UK Elections: ‘Hard Brexit’ goes out of the window
The snap elections in the UK were largely seen as the second referendum on Brexit. May’s strong performance would have meant the Britons approve of her ‘Hard Brexit’ stance. However, PM May’s Conservative party put on a poor show in the elections.
As of writing, the Conservatives were seen falling short of the majority. Sky News and BBC forecast a hung parliament. What it effectively means is that ‘Hard Brexit’ has been rejected by the Britons. The new PM (or PM May) is more likely to move away from Hard Brexit in the days ahead and that could boost both GBP and EUR, although in the short-run the sell-off in the EUR/GBP could weigh over the EUR/USD pair.
Watch out for EU response
Brussels is likely to respond positively to every situation that takes UK away from ‘Hard Brexit’. Once again, the focus would be on the EUR/GBP cross. As noted here, the Yen remains weak, suggesting the sell-off in Pound could be short lived. A sharp recovery in GBP (drop in EUR/GBP) could weigh over EUR/USD pair.
Focus on Treasury yields
The next major event will be the FOMC rate decision due on June 14. The treasury yields may rise ahead of the Fed, thus boosting the demand for the US dollar.
EUR/USD Technical Levels
The topping pattern – hanging man and a bearish follow through – has opened doors for 1.1118 (0.618 extension of April low – May 8 high – May 11 low + support offered by the trend line sloping higher from Apr 17 low – May 11 low) and 1.1109 (May 30 low). A daily close below the same would expose 1.10 (zero figure).
On the higher side, only a daily close above 1.1285 (June 2 high) would signal continuation of the rally from April 10 low of 1.0569. The move would open up upside towards 1.1366 (August 2016 high) and 1.1428 (June 2016 high).