Did ECB Just Put Brakes on Euro’s Rally? EUR/USD, EUR/AUD, EUR/JPY

The European Central Bank (ECB) may have just raised the bar for an imminent break higher in the euro against some of its peers.

The ECB delivered the widely expected rate hike and boosted hopes that the central bank is nearing a pause in its tightening campaign. Going into the meeting, there were minor signs of fatigue in EUR’s rally – see “US Dollar Price Action Ahead of Fed Rate Decision: EUR/USD, GBP/USD, AUD/USD”, published May 3.

After a series of jumbo rate hikes, the European Central Bank hiked the main deposit rate by 25 basis points to 3.25%, in line with market expectations. The central bank maintained a hawkish stance saying interest rates were not yet “sufficiently restrictive” to get inflation down to the ECB’s 2% target. The reference to future “policy decisions” suggests more than one rate hike in the cycle.

ECB’s downshift was probably in light of dismal Q1 GDP growth, cooling inflation, and tightening of credit conditions, suggesting that the impact of the rate hikes is starting to trickle down the economy – “forcefully”, the ECB said. The central bank’s sensitivity to the strong transmission mechanism implies downside risks to the terminal rate. As a result, money markets have now scaled back expectations of the ECB terminal rate to 3.65% from 3.75% before the ECB meeting, weighing on EUR.

EUR/USD Weekly Chart

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EUR/USD: Watch for signs of any setback

From a big-picture perspective, there is no doubt EUR/USD’s trend is up (see the previous update published on May 3 for more discussion on the larger trend). However, EUR is now in a stiff resistance zone of 1.10-1.12, including the 200-week moving average and the early-February high of 1.1035, not too far from the 200-week moving average (now at about 1.1200). A negative divergence (rising price associated with a flattening 14-week Relative Strength Index) on the weekly charts suggests EUR/USD’s rally is looking tired.

EUR/USD 240-minutes Chart

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To be sure, this wouldn’t necessarily imply an imminent turn lower. Indeed, the pair could even give a shot at 1.1200. This probably means being watchful for any cracks in the rally. Specifically, key cushion zone is around 1.0900 on the 240-minute charts. A break below the support would imply that the upward pressure had faded in the short term.

EUR/AUD Daily Chart

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EUR/AUD:Runs into a major roadblock

EUR/AUD has retreated sharply from a strong converged ceiling, including the October 2020 high of 1.6825, roughly coinciding with the upper edge of a rising channel from mid-2022. While the broader trend remains up, any break below immediate support at the mid-April low of 1.6215 would confirm that the upward pressure had peaked in the near term. Such a break could open the door towards converged support at 1.58-1.61. For discussion on market diversity in EUR/AUD, see “Australian Dollar Price Setup: EUR/AUD, GBP/AUD, AUD/JPY”, published May 3.

EUR/JPY Daily Chart

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EUR/JPY: Inverted “V”-shaped fall

The inverted “V”-shaped decline on the daily charts suggests cracks are beginning to emerge in EUR/JPY’s rally as it tests a stiff hurdle at the 2014 high of 149.75. Any break below the late-April low of 146.25 would confirm that the uptrend had truncated for now, pointing to a consolidation/minor retreat in the near term.

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