EUR/USD may need a dovish-ECB cut to extend its slide

Conditions for euro bears have been ripe for the past three weeks. Expectations for Fed cuts have been drastically reduced over the next year sent the US dollar broadly higher, while weaker data from Europe and murmurs of cuts from ECB members weighed on the euro.

Expectations that the ECB will cut by 25bp on Thursday are high. But as EUR/USD has already seen a hefty selloff, the cut could already be priced in. Besides, a cut is not actually a done deal with some members pushing back against it. And that could prompt quite a bounce for EUR/USD should the ECB not cut this week, especially if US retail sales falters alongside jobless claims on Thursday. And even of the ECB do cut, I doubt they will signal further easing at this meeting given the discord among its members.

Take note that we have inflation data for Spain and France released today, ahead of industrial production data for the EU and ZEW economic sentiment for the EU and Germany. That leaves euro pairs vulnerable to pockets of volatility over the near-term, and even a new cycle low should data come in soft enough. But it might require a dovish cut from the ECB to expect the euro to extend its selloff by any meaningful amount.

EUR/USD technical analysis:

The decline from 1.12 has effectively been in one move, and EUR/USD shows the potential to continue lower to 1.08. But the move may be nearing at least a short-term inflection point. Prices are holding just above the 1.09 handle and clinging to its 200-day EMA monthly S2 pivot. The daily RSI (2) is oversold and forming a small bullish divergence. And with the 200-day SMA just 25-pips below, I suspect bulls may be waiting for any moves towards it.

Quite how much of a bounce really does depend on how incoming data plays out. But the most bullish case for EUR/USD this week would be inflation to not be as soft as expected, the ECB not cut (or not deliver a dovish tone alongside a 25bp cut) and US data come in stronger than expected.

• Bulls could seek dips towards the 200-day SMA
• 1.0950 has been respected as support and resistance in recent times, making it a viable upside target for countertrend trades.
• A break above which bringing the 1.10 handle into focus
• Further out, the bias is for EUR/USD to head for 1.08 / August low if a swing high materialises

EUR/JPY technical analysis:

This is a market I am keeping an eye on, should appetite for risk take a turn for the worse. Its rally from the September low has paused just beneath the monthly R2 pivot and May low, with the 200-day EMA sitting just above the 164 handle. Prices are in a small consolidation which could equally become a bullish continuation or bearish reversal pattern. But with resistance levels being respected, a change of sentiment or renewed round of BOJ hawkishness could knock it from its perch.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge