Forex traders have suddenly become woke to the possibility of an end to ECB QE and interest rate hikes this year. As a result, EUR/USD, after two consecutive weeks of declines, has found a bit of support as traders return from their Easter break this week. Considering that market participants glossed over more hawkish tones from last week’s April ECB meeting, this recent positive shift in sentiment toward EUR/USD looks abrupt and possibly only temporary.
Prior to today’s ECB speakers talking up the prospects of a quick end to asset purchases and interest rate hikes by year end, traders had not fully bought into such an assessment. The ECB must not only contend with high inflation, but also war in the Ukraine, signs of slowing activity in the euro area. Add in aggressive Fed hiking expectations and there are certainly enough reasons to still dissuade big EUR/USD long positions.
The bigger picture technical setup adds to the apprehension that the recent move in EUR/USD marks the begging of a reversal in the currency pair’s fortunes. Last week, the EUR/USD slipped below a symmetrical triangle pattern that has been long in the making. This week’s retest of the pattern, with support now turned resistance, isn’t out of character for the forex market. Likewise, a rising wedge pattern sits behind the last leg lower in EUR/USD, which points to downside continuation.
That said, these are undeniably testing times for the EUR/USD. Should EUR/USD resist dipping lower from recent levels, there is a possibility for the currency to stabilise at higher levels. A break above the 1.11849 last swing high, for instance, would be the first step in attracting EUR/USD buyers. Getting to that state, however, will most likely take more than just words from the ECB given the current market setup.
