EUR/USD risks tilt to the downside on Draghi-Yellen divergence

The EUR/USD pair rose to a high of 1.1219 in the North American session following the release of the dismal US data before ECB’s Draghi poured cold water on expectations of QE taper and pushed the spot lower to 1.1182 levels. The currency pair traded around 1.1185 levels in Asia.

ECB President Draghi speech is scheduled at 8:00 GMT today. The central bank head is likely to reiterate the positives of lower rates and once again squash hopes of reduction in the monetary easing.

Focus on Yellen speech

Fed Chair Yellen is set to deliver a speech in Europe on Tuesday. Traders expect her to defend the outlook for three rate hikes this year, despite the deterioration in the economy.

Fed’s hawkish rate hike earlier this month did catch markets off guard, but the subsequent rally in the USD has been very slow and the treasury yield curve continued to flatten. Moreover, the action in the treasuries suggests the bond traders are not buying the Fed’s hawkish view.

Nevertheless, hawkish comments from Yellen today would not only underscore the growing divergence between the Fed and the ECB, but would also add credence to BIS’ argument that central banks should go ahead with the great unwind (undo what has not worked). Thus, EUR/USD may feel the pull of the gravity.

On the other hand, the dovish surprise from Yellen may push EUR/USD back above the rising trend line (sloping upwards from Apr 17 low and May 11 low).

EUR/USD Technical Levels

Last two weekly candles were Doji. The first one had a long upper shadow (bullish exhaustion), while the second one was a long legged one (dip demand/bearish exhaustion). The spot is thus trading in a no man’s land - range of 1.1296 (high of the weekly candle with a long upper shadow) - 1.1119 (low of last week’s Doji candle). The weekly chart also shows repeated failure at 1.1284 (161.8% Fib expansion of Dec low - Jan high - Feb low).

A daily close above 1.1296 would open doors for 1.1366 (Aug 2016 high) and 1.1428 (June 2016 high). On the lower side, a daily close below 1.1119 could yield a sell-off to 1.1074 (50-DMA) and 1.10 (zero figure).