EUR/USD - Monetary pol divergence favors deeper correction

• ECB favors a baby step approach to policy normalization.
• Fed could hike rates more aggressively than previously assumed.
• EUR/USD risks deeper correction due to monetary policy divergence.

The European Central Bank (ECB) and the Federal Reserve (Fed) minutes released this week showed growing policy divergence between these central banks.

While some officials at the ECB want to drop their easing bias on QE and could do so in the next 2 meetings, still the lift-off (first rate rise) is unlikely to happen before early/ mid-2019. On the other hand, markets fear the Fed could tighten policy aggressively than previously thought.

Clearly, the monetary policy divergence favors the greenback. Hence,  the odds of a deeper EUR/USD correction, possibly to 1.20, are high.

As of writing, the spot is trading on the back foot at 1.2310. The EUR may run into offers if the German fourth quarter GDP shows a slowdown in the economy, and the final Eurozone CPI prints below the preliminary estimate.

EUR/USD Technical Levels

Valeria Bednarik, Chief Analyst at FXStreet, writes, "technical indicators in the 4 hours chart have extended their recoveries from oversold levels up to their mid-lines, without surpassing them, somehow indicating that buying interest is still limited. Furthermore, the pair remains below a bearish 20 SMA, a few pips below the mentioned 1.2340 Fibonacci level, while the 100 SMA is closer to the next Fibonacci resistance. Below the daily low, on the other hand, the pair will turn bearish with scope then to test the 1.2205 level, February low."

Support levels: 1.2300 1.2260 1.2225

Resistance levels: 1.2340 1.2380 1.2425