EUR/USD Analysis: Signs of bullish exhaustion emerge, US data eyed for fresh impetus

The EUR/USD pair retreated from the highest level since January and slipped below the 1.2200 mark on Wednesday, reversing a major part of its gains recorded over the past two trading sessions. The US dollar turned higher for the first time this week amid a modest uptick in the US Treasury bond yields. Adding to this, caution ahead of key US economic data coming out on Thursday and Friday helped to put a tentative floor under the greenback. This, in turn, was seen as the only factor that prompted some profit-taking around the major.

The shared currency was further undermined by comments from the ECB Executive Board member Fabio Panetta, saying that a discussion about phasing out the PEPP is still premature. We are now seeing a further undesirable increase in yields and a premature withdrawal of policy support would risk suffocating the recovery, Panetta added. On the other hand, Fed Vice Chair Randal Quarles said that it will become important for the FOMC to begin discussing the plans to adjust the pace of asset purchases at upcoming meetings if the economic data come in stronger than expected.

The pair finally settled near the lower end of its daily trading range and dropped closer to weekly lows during the Asian session on Thursday. The downside, however, remains cushioned amid firming expectations that the Fed will retain its ultra-lose monetary policy stance for a longer period. Various FOMC officials eased worries about runaway inflation and reiterated that any spike in prices would be temporary, forcing investors to scale down their bets for an earlier than anticipated lift-off.

Market participants now look forward to the US macro data for a fresh impetus. The US economic docket highlights the release of the Prelim (first revision) Q1 GDP, the usual Initial Weekly Jobless Claims, Durable Goods Orders and Pending Home Sales. Apart from this, the US bond yields will influence the USD price dynamics and produce some trading opportunities around the pair.

Short-term technical outlook

From a technical perspective, the recent price action has been confined between two converging ascending trend lines. This constitutes the formation of a rising wedge pattern on short-term charts and could be seen as the first sign of bullish exhaustion. A convincing break below the monthly ascending trend-line support, currently near the 1.2170 region would shift the near-term bias in favour of bearish traders. The pair might then accelerate the corrective slide towards the 1.2100 mark en-route the next major support near the 1.2065-60 region. Some follow-through selling has the potential to drag the pair further towards testing levels below the key 1.2000 psychological mark.

On the flip side, the 1.2230-35 region now seems to act as immediate strong resistance. This is followed by the 1.2265 zone (weekly swing highs) and the top end of the bearish wedge, around the 1.2285 region. A convincing breakthrough will negate the bearish pattern and set the stage for an extension of the pair's recent strong positive momentum. The momentum should allow bulls to aim back to retest YTD tops, around mid-1.2300s and could further get extended towards the 1.2400 round-figure mark.