EUR/USD - Three White Soldiers bullish reversal confirmed, Is ECB rate hike speculation overdone?

EUR/USD closed at 1.1417 on Friday, marking the third straight monthly rise as investors baked-in the possibility of an early ECB taper and interest rate hike.

Technical bullish reversal

The spot has formed a nice falling tops formation from 1.6038 (July 2008 high). The ‘Three White Soldiers pattern at the bottom of 9-year long downtrend on the monthly chart indicates a strong trend reversal. However, it doesn’t mean that the spot is on a one way trip to key psychological figure of 1.20.

This is because the major part of the rally has been based on expectations that the ECB QE taper and a rate hike would happen sooner-than-expected.

Eonia curve steepening may be overdone

Draghi’s hawkish talk last week led to a marked steepening in Eonia forwards. The 12-month forwards currently hovers around -10 bp, which means the investors expect a 25 bps rate hike in one-year’s time.

The steepening may be overdone as ECB’s (potential) QE taper this year could weigh over inflation and force the ECB to delay the rate hike beyond Q3, 2018.

Focus on US data

The USD may strengthen if the US ISM manufacturing numbers beat estimates and shows a sharp rise in the employment. Moreover, it could lead to a steepening of the treasury yield curve and yield a technical pullback in the EUR/USD pair.

EUR/USD Technical Levels

The spot traded around 1.1410 in Asia. A break above 1.1428 (June 2016 high) would expose 1.1465 (Apr 2016 high) and 1.15 (zero levels). On the other hand, a breakdown of support at 1.1396 (5-DMA) would open up downside towards 1.1369 (1-hour 100-MA) and 1.1296 (June 14 high).

On the 1-hour chart, we see a head and shoulders pattern with neckline support at 1.1395. On the 4-hour chart, we see bearish price-RSI divergence.