EUR/USD: back below the 4-hr 10 SMA, where next?

• EUR/USD in a correction, but will the dollar talk again?
• EUR/USD weighed by a change of tides in political and monetary policy sentiment.

EUR/USD has met a roadblock at 1.2296, the European highs made yesterday, and finds itself trading back below the 4hr 10-SMA (1.2247) as US traders return and a better bid US dollar. Currently, EUR/USD is trading at 1.2237, down -0.27% on the day, having posted a daily high at 1.2284 and low at 1.2195.

Dollar Index consolidates modest daily gains, remains near 3-year lows

The euro was weighed down by one report suggesting that the SPD was not inclined to work with the CDU in a coalition and another suggesting that the ECB will not modify its forward guidance at next week’s policy meeting, both of which were major supportive factors to the euro's sudden rise last week.

All eyes on ECB

Analysts at Scotiabank argued the EUR may suffer a deeper setback if next Thursday’s policy meeting hark’s back to September and focuses on EUR strength as a possible concern for policy makers. "We think, however, that EUR gains should cause less concern for the ECB leadership now (inflation expectations higher and less influenced by FX developments than last year)."

Meanwhile, it is not evident that this more on the greenback is anything more than a technical and minor correction, as there does not seem to be any macroeconomic developments behind the dollar's stabilization which analysts at Brown Brothers Harriman argue that this is just suggesting a pause in the downtrend rather than a reversal at this juncture.  "That said the extent and duration of what appears to be little more than a technical adjustment is the key to the near-term outlook," the analysts added.   

EUR/USD levels

"Short-term trend momentum has been checked by the drift lower ion the EUR overnight but the spot market is finding support about where we expected (low 1.22s) at the moment and the internal dynamics of the move up remain strong. Intraday price action looks a little soft but the undertone at the moment looks consolidative, rather than outright negative. We look for support to remain firm on dips to the 1.22 area; loss of 1.2165/75 would signal the risk of a deeper setback, however," explained the strategists at Scotiabank.