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Despite a short-term upside break-out from the channel, euro didn’t found its direction decisively last week and closed just 5 pips below the 1.3000 line. Euro weakness induced by the European Central Bank rate cut on May 2, followed by plenty of negative fundamentals coming from the Eurozone, has been offset by the dollar weakness during the second half of the month.

We believe the negative economic situation in the Eurozone, which prompted ECB to cut rates, has not yet been priced in fully, as the temporary dollar weakness halted the descend. Dollar bulls took a breather amid speculations the Federal Reserve may reduce its QE later than expected.

Return of euro bears?

Next week, however, focus will turn back on Europe and the ECB monetary policy decision due on Thursday. Although Mario Draghi is not expected to make adjustment to the policy announced just month ago, investors will seek for clues on possible negative deposit rates. Still, both the negative deposit rates and persisting economic troubles in the region will likely trigger another euro sell-off.

Such scenario may find its support also from the technical perspective. The pair has been consolidation in the triangle recently, as shown in the below picture, indicating a possibility of a stronger break-out in some direction. After having applied the Fibonacci retracements on the latest two major swings, we may see the first correction came back only to the 38.2%, while the following rally returned back by over 76%, which generally is an indicator of the upcoming trend reversal. After breaking below 1.2950 support level we believe there is a solid chance of strong downside movement later on.