EURUSD – repeated close below daily cloud to weaken near-term structure

The Euro remains constructive on Friday and extend recovery of Wednesday’s sharp fall (the pair was down 1.4% for the day) into second straight day, although fresh bulls show signs of fatigue.

Conflicting fundamentals, which were recently the main drivers, provide mixed signals, lacking clearer near-term direction.

The European Central Bank, as expected, raised interest rates by 50 basis points yesterday, but the fact that there are hawks among policymakers, which advocate for more aggressive and longer lasting tightening phase, contribute to supportive factor for euro.

Eurozone inflation came in line with expectations in February, with annualized CPI ticking lower to 8.5% from 8.6% in January, but core inflation, an indicator closely watched by the ECB, rose to 5.6% in February from 5.3% previous month.

This signals that underlying inflation remains strong, adding to ECB’s comments that inflation is too high and will last too long and contributing to signals that the central bank would continue to raise interest rates in coming months, in permanent fight with historic rise in prices.
Some optimism could be seen from easing energy prices, though still without significant signs of improvement.

On the other hand, simmering crisis in banking sector, which sent shockwaves through the markets and shook financial sector in past few days, threatens to further destabilize it, which could be negative for euro.

In the situation of deteriorating conditions, after the third bank in the US was caught in increased volatility after  collapse of two banks last week, the ECB supervisory board met ahead of schedule and said that they expect no contagion to eurozone banks from current market turmoil.

Technical studies on daily chart are also mixed, as bullish momentum is fading, moving averages (10/20/30DMA) remain in bearish setup and rising base of  thinning daily Ichimoku cloud capping the action for the second straight day.

However, the cloud twist on Mar 27 would attract further gains, keeping expectations for fresh upside still in play.

Near-term action remains weighed by Wednesday’s large bearish daily candle and today’s close will be in focus.
Repeated close below cloud base (1.0660, reinforced by daily Kijun-sen) will be negative signal, which would be boosted by close below daily Tenkan-sen at (1.0637) and increase risk of retesting Wednesday’s low at 1.0516.

Conversely, initial positive signal could be expected on close within the cloud that would expose pivotal barrier at 1.0759 (Wednesday’s high).

Res: 1.0637; 1.0661; 1.0712; 1.0759
Sup: 1.0567; 1.0551; 1.0516; 1.0460