EUR/USD Breaks Down to a Two-Month Low as US Dollar Bulls Charge

• US Dollar surges after hawkish FOMC meeting.

• Heavily oversold conditions may give EUR/USD some short-term respite.

The US dollar is flexing its muscles across the board after Wednesday‘s FOMC meeting showed Fed members signaling at least two interest rate hikes in 2023. Fed chair Jerome Powell also said that inflation ’could turn out to be higher and more persistent than we expect‘ a nod that the recently oft-quoted ’transitory price pressures are now becoming stickier than previously expected. The overall hawkish outtake from the meeting has sent the US dollar running higher, breaking multi-week and month trading ranges across a wide range of USD pairs. The daily DXY chart below shows that the US dollar is now flashing an extremely overbought signal, using the 14-day ATR indicator.

EUR/USD is now back at lows last seen in mid-April with previous support having been washed away. Along with a range of other USD pairs, multi-week and multi-month trading ranges have been broken as volatility returns with a bang. The sharp sell-off has now pushed the pair below the longer-dated moving average (200-day sma), adding to the bearish outlook, while the 20-dsma continues to turn lower.

EUR/USD is now touching the 23.6% Fibonacci retracement (1.1942) of the March 2020/January 2021 rally, and a close and open below here may set up the pair for further losses. The recent sell-off has sent EUR/USD into heavily oversold territory and this needs to be pared back if sellers are to dominate the next move. The next level of support is seen around the 1.1700 from the 38.2% Fib retracement and the March 31 swing-low.

Retail trader data show 55.64% of traders are net-long with the ratio of traders long to short at 1.25 to 1. The number of traders net-long is 29.61% higher than yesterday and 50.41% higher from last week, while the number of traders net-short is 30.83% lower than yesterday and 38.05% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall.Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/USD-bearish contrarian trading bias.

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