EUR/USD - Bearish confirmation ahead of Draghi’s speech

Monday’s bearish engulfing candle followed by Tuesday’s drop confirmed a short-term trend reversal in the EUR/USD pair ahead of the ECB President Draghi’s speech.

Draghi will make a speech in the Dutch Parliament at 12:00 GMT. This will be his first speech after the French election.

EUR needs less dovish ECB to push through 1.10 handle

EUR/USD printed a high of 1.1022 on Monday only to fall back to 1.0922 and extend losses to 1.0863 levels on Tuesday. The retreat from 1.1022 could be partially due to ‘sell the fact’ trade following Macron’s victory in the French elections.

Meanwhile, sharp rise in the June Fed rate hike odds and hawkish Fed speak also seem to have contributed to the EUR / USD weakness.

The Fed looks set to raise rates by 25 basis points in June. Policymakers are also considering trimming the $4.5 trillion balance sheet later this year. Consequently, EUR/USD would require a little help from Draghi in order to chew through offers around 1.10 handle.

Could ECB be the first to follow the Fed?

In the past, the Bank of England (BOE) has been the one to follow the Fed. Bank of Canada (BOC) rates tend to follow the US rates as well. However, both central banks have lagged big time this time. BOE is unlikely to raise rates before 2019.

The soft Eurozone core inflation has triggered a debate as to whether the ECB could be prepared to shift its forward guidance. The central bank kept its forward guidance dovish in April, but Draghi did say the sense of urgency with respect to the economic outlook had abated and the downside risks have further diminished.

With the electoral risk out of the way, there is speculation in the market that the ECB could alter this guidance in the coming months to suggest a reduction in policy accommodation and may very well end up being the first major central bank to follow the Fed.

EUR/USD Technical Levels

The spot ticked up slightly in Asia around 1.0890. A break above 1.0915 (10-DMA) would expose 1.0951 (Arp 26 high) and 1.10 (zero levels). On the other hand, a breach of support at 1.0863 (previous day’s low) would expose 1.0834 (200-DMA). A daily close below the same would add credence to the bearish candlestick reversal pattern and could yield 1.0738 (50-DMA).