EUR/USD drops to one-week lows on stronger US dollar

The Euro came under pressure after ECE meeting despite higher yields. On the American front, the US dollar gains momentum as market sentiment deteriorates.

The EUR/USD pair has dropped further during the US trading session and bottomed at 1.0643 touching the lowest level in a week amid a stronger US dollar on the back of risk aversion triggered by higher yields.

The euro peaked versus the US dollar on Thursday at 1.0773, the highest level in a week following the European Central Bank announcement. The central bank, as expected, kept interest rates unchanged and said it intends to raise rates at the July meeting by 25 bps.

The ECB’s implied near-term profile, and now expect a 25bps hike in July and a 50bps hike in September. Beyond that, we look for a further 50bps hike in October before the ECB slows the pace to 25bps hikes in December, February, and March. This would take the depo rate to 1.50%, which we believe is the ECB’s estimate of its neutral rate.

During Lagarde’s press conference the euro lost momentum even as German bond yields hit fresh multi-year highs at 1.46%. EUR/CHF tumbled from above 1.0500 to 1.0370 and EUR/GBP hit level under 0.8500. In the US, Initial Jobless Claims rose more than expected, to the highest level in 20 weeks. On Friday, May’s CPI is due and next week is the FOMC meeting.

The slide of the EUR/USD pair up to now found support around the 1.0635 zone. It is a relevant area that also contains the 20-day Simple Moving Average. A daily close below should weaken the outlook for the euro, exposing the next support level at 1.0585 followed by 1.0520.

If the pair remains above 1.0640 it will likely continue to trade in the range 1.0640/1.0750. A break above the upper limit should clear the way for an extension of the recovery.