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EURUSD at Two-Month Low on Central Bank Divergence

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Technical analysis of Forex market

EUR/USD trades at its lowest level in two months on a post Fed hangover and on news that the Fed also started taper talk – highlighting the growing gap between the Fed and the ECB.

EUR/USD is extending losses for a third straight session. The pair trades at its lowest level in two months on a post Fed hangover and on news that the Fed also started taper talk – highlighting the growing gap between the Fed and the ECB.

The Fed’s Bullard confirmed that FOMC Chair Jerome Powell officially kicked off taper talk at the latest FOMC meeting.

This update comes after the Fed also surprised the market with a hawkish shift in the same June meeting, pointing to two interest rate hikes in 2023, when the meeting before nothing was expected until 2024.

After weeks even months of reassurance that inflation was transitory, the Fed is ramping up its hawkish stance pretty quickly. This stands in sharp contrast to the ECB’s position.

In its latest meeting the ECB was surprisingly Dovish, keeping its assets purchases at March’s elevated level. The ECB was clear that it was too soon to start talking about reining in monetary policy.

Draghi, ex ECB President and Italian Prime Minister also weighed into the debate saying that “the case for monetary and fiscal expansion remains compelling”.

So, with the Fed firing the taper talk gun and the ECB staying firmly dovish, circumstances favour EUR/USD bears.

Where next for EUR/USD?

EUR/USD trades at 2-month lows after three straight days of declines. The 50 sma on the 4 hour chart formed a death cross, crossing below the 200 sma in a bearish signal.

The RSI is showing deeply oversold conditions so caution should be taken before placing fresh shorts. A move higher or at the very least some consolidation around this level could be expected before further declines. What’s not so clear is the timing here, RSI conditions can remain in the red for something but not forever!

Immediate support is seen at 1.1860 a level which offered support in early April. A breakthrough here could open the door to 1.1825 the April 5 high before 1.1785 comes into play the high April 1.

Any attempt at a recovery would need to break through resistance at 1.1890 yesterday’s low, ahead of 1.1920 and 1.20 the psychological level. A move above here could go some way to negating the near term down trend.