EUR/USD: Bears may be losing steam ahead of ECB

• The EUR/USD pair created a long-tailed candle yesterday, signaling bear exhaustion.
• The markets have likely priced in dovish ECB. Expectations of the first ECB rate hike have been pushed out to mid-2020.

The EUR/USD pair witnessed two-way business yesterday before ending largely unchanged on the day at 1.1359.  

The long lower shadow attached to yesterday’s candle represents bearish exhaustion. Validating that argument is the bullish divergence of the relative strength index (RSI) on the hourly and 4-hour chart.  

It is worth noting that EUR/USD topped out at 1.1570 on Jan. 10 – two days after investors pushed back expectations for the first ECB rate hike into the middle of 2020. Notably, the currency pair has shed more than 200 pips in the last two weeks.  

Put simply, markets may be done pricing the possibility of the European Central Bank (ECB) turning dovish at the rate decision, scheduled for Thursday.

As a result, the currency pair may trade sideways-to-positive ahead of tomorrow’s ECB rate decision. As of writing, it is trading at 1.1367.  

The difference between the overnight and forward Eonia interest rates “” bank-to-bank interest rates for the eurozone, which provide some indication of how investors view the ECB rate trajectory “” imply a 10-basis-point rate hike is now only fully priced in around the middle of 2020, according to Reuters. Other money market futures, such as Euribor, point to a move even later in 2020.

EUR/USD Technical Levels