EUR USD continues to pare ECB driven gains

After last week’s dramatic surge for the euro and plunge for the dollar, EUR/USD has begun the new trading week by giving back some of those gains as the US dollar continued its tentative rebound early Monday.

The EUR/USD breakout last week was caused by a short squeeze after ECB President Mario Draghi took surprisingly milder-than-expected action this past Thursday to stimulate the European economy. As a result of this surprise, the euro rose sharply, prompting a plunge for the US dollar that resulted in its largest daily drop in years.

The ECB’s announcement Thursday was followed by Friday’s US Non-Farm Payrolls report that showed a better-than-expected 211,000 jobs added to the US economy. While this was a bullish sign for the dollar in that it provided further support for a December rate hike by the Fed, it failed to put a large dent in the dollar’s ECB-driven downside momentum.

That began to change early Monday, as the dollar made a further rebound and appeared poised to regain strength in the run-up to next week’s pivotal and long-anticipated Fed meeting. For the EUR/USD currency pair, despite last week’s rare surge, the bias remains moderately bearish in light of the continuing monetary policy divergence between the ECB and Fed.

From a technical perspective, last week’s breakout pushed EUR/USD above the key 1.0800 level up to its 50-day moving average before beginning a tentative retreat. This retreat was extended early Monday back down to the 1.0800 level before rebounding.

In the event of a breakdown and sustained return below 1.0800, EUR/USD should see a potential resumption of its previously strong bearish bias, with the key downside target remaining at the major 1.0500 support level. Longer-term, further downside targets continue to reside at 1.0200 and parity (1.0000).