• EUR/USD has turned south amid renewed dollar strength.
  • ECB warns financial markets could go into correction if policy is tightened faster than expected.
  • Dollar gathers strength as investors wait for FOMC to release May meeting minutes.

EUR/USD has lost its traction after having reached its strongest level in a month at 1.0750 on Tuesday. The pair stays on the back foot in the European session and closes in on key 1.0660 support level.

The renewed dollar strength on Wednesday is causing EUR/USD to stay under bearish pressure on Wednesday. The US Dollar Index, which lost more than 1% in the first two days of the week, is up 0.5% on a daily basis. In the absence of high-tier macroeconomic data releases, the cautious market mood seems to be helping the dollar find demand as a safe haven. As of writing, US stock index futures were down about 0.2%.

In the meantime, the European Central Bank's (ECB) Financial Stability Review seems to be weighing on the shared currency and not allowing EUR/USD to stage a rebound. 

The ECB warned in its publication that corrections in financial markets could be triggered by escalation of war, even weaker global growth or if the monetary policy needs to adjust faster than expected.

In the second half of the day, the FOMC will release the minutes of its May policy meeting. Markets have already priced in two more 50 basis points (bps) Fed rate hikes and participants will look for additional details on the Fed's balance sheet reduction plan. In case the minutes show that policymakers are willing to sell mortgage-backed securities to shrink the balance sheet by $95 billion per month from September, this could be seen as a hawkish development.

FOMC May Minutes Preview: Will the Fed have to sell MBS?

EUR/USD Technical Analysis

In case Tuesday's monthly high at 1.0750 is taken as the end-point of the uptrend that started on May 13, the Fibonacci 23.6% retracement at 1.0660 forms significant support. Right below that level, the 200-period SMA on the four-hour chart aligns as next support at 1.0640. With a four-hour close below the latter, EUR/USD could extend its slide toward 1.0600, where the ascending trend line meets the Fibonacci 38.2% retracement level.

On the upside, 1.0700 (psychological level, static level) aligns as initial resistance ahead of 1.0750 (monthly high). The pair needs to reclaim 1.0700 and stabilize above that level for bulls to retain control of the pricing action.

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