EUR/USD analysis: Tumbles on Draghi’s dovish comments, turns vulnerable ahead of FOMC

• Draghi’s dovish remarks prompt some aggressive selling on Tuesday.
• A modest pickup in the USD demand added to the bearish pressure.
• The market focus remains on the latest FOMC monetary policy update.

After an initial uptick to the 1.1240 region, the EUR/USD pair witnessed some aggressive selling and tumbled to two-week lows in reaction to surprisingly dovish comments by the ECB President Mario Draghi. Speaking at the ECB Forum in Sintra, Draghi opened the door for more rate cuts by saying that negative rates have proven to be a very important tool and further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools. Draghi's remarks clearly pointed to a more dovish shift moving forward and exerted some heavy pressure on the common currency.

This was followed by the disappointing release of the German ZEW Economic Sentiment Index, which dropped sharply to -21.1 in June and marked its lowest reading since November. The same gauge in the broader Euro-zone fell to -20.2 during the reported month and further dented the weaker sentiment surrounding the common currency. Meanwhile, the final Euro-zone CPI figures for May matched original estimates and showed prices rising by 1.2% yearly rate, albeit did little to ease the bearish pressure. 

On the trade-related front, the US President Donald Trump and his Chinese counterpart Xi-Jinping agreed to meet next week on the sidelines of G20 summit in Japan, which provided a strong boost to the global risk sentiment. This resulted into a goodish intraday rebound in the US Treasury bond yields, which underpinned the US Dollar demand and further collaborated to the pair's intraday decline farther below the 1.1200 round figure mark.

The pair held on the defensive through the Asian session on Wednesday as the market focus now shifts to the highly anticipated FOMC monetary policy decision, scheduled to be announced later during the US trading session. The US central bank is widely expected to leave interest rates unchanged but could lay the groundwork for interest rate cuts in coming months. With two rate cuts by the end of this year already priced in, any hawkish comments might reignite a broad-based USD rally. This coupled with the fact that the money markets have pulled forward expectations of a 10 bps rate cut by the ECB to December from March 2020, the pair seems all set to resume its prior well-established bearish trend.

From a technical perspective, the pair already seems to have found acceptance below the 1.1200 handle - marking 61.8% Fibonacci retracement level of the 1.1107-1.1348 recent up-move, and hence, remains vulnerable to weaken further. A follow-through selling has the potential to accelerate the slide back towards challenging the 1.1100 round figure mark with some intermediate support near mid-1.1100s.

On the flip side, any attempted move back above the 1.1200-1.1215 region might continue to confront some fresh supply near mid-1.1200s (nearing 38.2% Fibo. level), which if cleared decisively might negate the near-term bearish bias and prompt a near-term short-covering move. The positive momentum could then get extended further beyond the 1.1300 round figure mark towards retesting the 1.1325-30 supply zone en-route the recent swing high, around mid-1.1300s.