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Jignesh Davda

EUR/USD bears made another attempt to drive the currency pair below a confluence of support yesterday but were once again unsuccessful. The pair is starting to show signs of a reversal ahead of a highly anticipated speech from Fed Chair Jerome Powell later today.

US consumer prices were reported to fall sharply in April. CPI declined by 0.8% while core CPI fell 0.4%. Both figures were short of analyst expectations. The Bureau of Labor Statistics said it was the largest monthly decline since the financial crisis.

Federal Reserve Chair Powell will speak later today and the markets will anxiously wait to see how recent developments have impacted the views of the central bank. There has been some chatter of negative rates in the US and other parts of the world. However, Fed member speeches earlier in the week have highlighted that other forms of easing may take precedence over the unprecedented action of taking rates into negative territory.

In addition to Powell’s speech, the Bureau of Labor Statistics will release its latest producer price index figures in early North American trading.

Technical Analysis

EURUSD 4-Hour Chart

There are a few things to be mindful of when looking at the technical outlook for EUR/USD.

First, the pair is trading at the lower bound of its recent range, coupled with a slowing of volatility. The decline in volatility paves the way for a bounce higher in a mean reversion type fashion.

Volatility in the pair has slowed ever since the stock markets hit a bottom in late March. During the same period, the pair has made multiple attempts to make a sustained break below the 1.0800 level which have all ended in a bounce back towards the 1.1000 handle or higher.

Another technical item to consider is a rising trendline that originates from the low in March. This trendline has been tested twice now since last week and buyers have dominated price action following both tests.

Unless there is a distinct change in the fundamental backdrop for EUR/USD, a return to the 1.1000 area appears probable in light of recent price action.


Bottom Line

  • The 1.0800 level in EUR/USD has proven to be a strong floor for the currency pair.
  • Fed Chair Powell will speak later today and his speech stands to trigger short-term volatility for the exchange rate.
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