After indicating a potential slowdown in bullish momentum below the 1.11 level, EUR/USD experienced a pullback that was influenced by the European Central Bank (ECB). Last Thursday, the ECB decided to raise rates by 25 basis points, which had already been anticipated by the market, leading to some profit-taking above 1.10.

Since then, the retreat has extended beyond the first decent support zone around 1.0965, suggesting a deeper retracement towards 1.0910. Today’s closing price will provide insight into the likelihood of a bullish continuation (closing above 1.0965) or a deeper pullback (closing below 1.0965). The next support has been formed around 1.0940 and below there, we have 1.0910, while resistance is at 1.1075-1.11.

It’s worth noting the significant decline in volatility this week, as indicated by the Average True Range (ATR) indicator, which has been trending lower since the banking turmoil in March. Although traders were waiting for the US cpi inflation report which was released a while ago. The Relative Strength Index (RSI) has moved towards neutral territory, which opens up the possibility of another attempt to retest the yearly high. If a breakdown of 1.0910 occurs with subsequent momentum, it would raise concerns about the sustainability of the current bullish trend and require further evaluation.

The ECB is keeping the hawkish bias, with recent comments from ECB members Kazimir, Nagel, Schnabel, and Stournaras have contributed to the ongoing debate. They believe that more action is needed to reduce inflation and that rate cuts are unlikely in the near future. On the other hand, ECB dove Stournaras has focused on a different message, stating that rate hikes will cease in 2023. Market participants continue to consider the statements of influential policymakers.

Another factor contributing to the momentum of the pullback following the ECB rate decision is the overcrowded long position in EUR/USD. The excessive number of long positions compared to shorts has created an opportunity for the current retracement to unfold. As the market rises, EUR/USD bears find more value for potential short trades. However, until a confirmed trend reversal occurs, the most prudent approach is to align with the prevailing trend. Although, the 200 SMA (purple) added to the support above 1.0940 today and we saw a bounce above 1.10. But the 50 and 100 SMAs which were acting as support have turned into resistance now. So, this pair has declined a step lower, which is a bearish signal.