Euro weakens on ECB comments

The Euro, single currency which staged a surprise rally in recent weeks, squeezing out most of the weak short positions saw an accelerated decline in early European trading session today. Attributing the decline to ECB’s comments from governing council member, Benoit Coeure who was quoted that the ECB would front load is bond purchase program, or in other words step up its purchased in May/June in order to offset the low liquidity periods in July/August. The typical summer months where trading usually slows down across the region.

The Euro was under pressure since the start of the week as noted in our weekly FX Technical report where we noticed the bearish engulfing candlestick on the daily chart that was formed on Monday.

Adding to the bearish pressure was also the fact that Greece continues to be a sore thumb as news reports emerged that the country has dangerously close to falling short of meeting its IMF payments, which are due in late May and early June. Ongoing negotiations do not seem to be heading anywhere in this aspect.

Market chatter is assuming that the current rhetoric is due to the fact that the Euro has been trading at somewhat elevated levels against the Greenback and that the ECB official’s comments are being seen as an attempt to verbally talk down the currency.

Be that as it may, the technical charts for EURUSD do point to a short term correction with the most immediate level in question being 1.11334 following which 1.0948 will be critical to watch within the near term.

Technically speaking, we do expect a dip towards 1.0948 through 1.1 which could be the line in the sand. A successful test of support here could see the Euro prepare for a liftoff against the US Dollar, while a break lower could start to attract Euro bears which could see the currency decline to test previous lows at 1.0552 through 1.04615.

Later today, Eurozone economic data will see the German ZEW Economic sentiment which is expected to be lower than previous month’s 53.3 reading. This is followed up by Eurozone CPI which is expected to be flat at 0%, while the core CPI is expected to be steady at 0.6%

In US trading session will see the building permits and housing data due to be released. The US Dollar Index has managed to stage a comeback from the lows near 93.2 and on the 4-hour chart, the trade weighted index formed a bullish divergence to the RSI. Price action broke above 94.15, confirming the divergence and also breaking a short term falling trend line.

Currently, the US Dollar Index is flirting near the longer term falling trend line, which is close to the major resistance at 95.25. A break above this level is essential to see further gains in the US Dollar, failing which; we could see most of the currencies stage another strong leg of rally. The RSI is already heading into overbought levels and it will be interesting for the US Dollar in the next few sessions to see how price action will shape up.