EUR/USD Analysis: Oversold conditions warrant caution for bears ahead of ECB’s Lagarde

• EUR/USD dropped to two-and-half-month lows on Friday amid sustained USD buying interest.
• The Fed’s sudden hawkish shift, the risk-off mood continued underpinning the safe-haven USD.
• Investors now look forward to the ECB President Lagarde’s testimony for some trading impetus.

The EUR/USD pair added to the post-FOMC losses and witnessed some follow-through selling on Friday amid a broad-based US dollar strength. The Fed last week surprised markets and brought forward its timetable for the first post-pandemic interest rate hikes. The so-called dot plot pointed to two rate hikes by the end of 2023 as against March’s projection for no increase until 2024. This, in turn, continued acting as a tailwind for the greenback.

Apart from this, a selloff in the global equity market further benefitted greenback’s relative safe-haven status. The already stronger buck got an additional boost after St. Louis Federal Reserve President James Bullard said that the Fed Chairman Jerome Powell officially opened taper discussion at the last meeting. Speaking to CNBC, Bullard added that the shift toward a faster tightening of monetary policy was a natural response to stronger economic growth and a quicker than expected rise in inflationary pressures.

The combination of factors, to a larger, extent, helped offset a sharp decline in the US Treasury bond yields. In fact, the yield on the benchmark 10-year US bond tumbled to the lowest since February, while those on 30-year bonds fell below 1.20% for the first time in more than four months. Nevertheless, the USD Index posted its best weekly gains in about 14 months and stood tall near multi-month peaks during the Asian session on Monday.

The pair, however, seems to have stabilised around mid-1.1800s ahead of the ECB President Christine Lagarde’s testimony before the European Parliament Economic and Monetary Affairs Committee. Investors will look for fresh clues about the future monetary policy stance, which will influence the shared currency. This, along with the USD price dynamics, should produce some meaningful trading opportunities amid absent relevant market moving economic releases.

Short-term technical outlook

From a technical perspective, last week’s sustained break below the key 1.2000 psychological mark, which coincided with the very important 200-day SMA, was seen as a fresh trigger for bearish traders. That said, extremely oversold conditions on short-term charts held traders from placing fresh bearish bets and helped limit further losses, at least for the time being. Hence, it will be prudent to wait for some strong follow-through selling below the 1.1840 area before positioning for any further depreciating move.

The pair might then accelerate the slide towards challenging the 1.1800 round-figure mark. The downward trajectory could further get extended towards the 1.1765-60 intermediate support en-route YTD lows, around the 1.1700 round figure touched on March 31. This should now act as a key pivotal point for short-term traders, which if broken decisively should pave the way for an extension of the ongoing depreciating move witnessed over the past three months or so.

On the flip side, any meaningful recovery attempt might now confront stiff resistance and remain capped near the 1.1900 mark. A sustained strength beyond might prompt some short-covering move and lift the pair back towards the 1.1960 static barrier. The subsequent positive move might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly near the 1.2000 level.