EUR/USD Rate Rebound Stalls Ahead of ECB Rate Decision

EUR/USD Rate Talking Points

The EUR/USD rebound following the US Non-Farm Payrolls (NFP) report appears to be stalling ahead of the European Central Bank (ECB) interest rate decision as the exchange rate struggles to extend the series of higher highs and lows from the monthly low (1.2104).

EUR/USD Rate Rebound Stalls Ahead of ECB Rate Decision

EUR/USD seems to be stuck in a narrow range despite the upward revision in the Euro Zone Gross Domestic Product (GDP) report, and the exchange rate may continue to consolidate ahead of the ECB meeting as the central bank appears to be on track to retain the current course for monetary policy.

It seems as though the ECB is in no rush to switch gears as President Christine Lagarde offered a dovish guidance following a Eurogroup meeting from earlier this month, and the Governing Council may continue to support the Euro Area as the monetary union faces a technical recession.

In turn, the ECB may stick to the same script as “the outlook for both growth and inflation remained dependent on the support of fiscal policy measures and the very accommodative monetary policy,” and more of the same from President Lagarde and Co. may spark a bearish reaction in EUR/USD if the Governing Council stays on track to increase its purchases under the pandemic emergency purchase programme (PEPP) “at a significantly higher pace than during the first few months of the year.”

At the same time, a less dovish forward guidance may fuel the recent rebound in the Euro as the Governing Council insists that “the future pace of purchases under the PEPP was data-dependent and would continue to be based on the joint assessment of financing conditions and the inflation outlook,” and the tilt in retail sentiment may persist following the ECB meeting as traders have been net-short EUR/USD since April.

The IG Client Sentiment report shows 38.50% of traders are currently net-long EUR/USD, with the ratio of traders short to long standing at 1.60 to 1.

The number of traders net-long is 5.13% higher than yesterday and 9.78% higher from last week, while the number of traders net-short is 0.42% higher than yesterday and 4.78% lower from last week. The rise in net-long position has helped to alleviate the crowding behavior as only 37.51% of traders were net-long EUR/USD last week, while the decline in net-short interest comes as the exchange rate extends the rebound from the monthly low (1.2104) following the NFP report.

With that said, it remains to be seen if the decline from the January high (1.2350) will turn out to be a correction in the broader trend rather than a change in EUR/USD behavior as the crowding behavior from 2020 resurfaces, and the exchange rate may continue to consolidate ahead of the ECB meeting as it struggles to extend the recent series of higher highs and lows.

EUR/USD Rate Daily Chart

Source: Trading View

• Keep in mind, EUR/USD established a descending channel following the failed attempt to test the April 2018 high (1.2414), but the decline from the January high (1.2350) may turn out to be a correction in the broader trend rather than a change in market behavior as the exchange rate trades back above the 50-Day SMA (1.2064) to break out of the bearish trend.
• The Relative Strength Index (RSI) showed a similar dynamic as the oscillator reversed ahead of oversold territory to break out of a downward trend, but the string of failed attempts to push above 70 suggests the bullish momentum will continue to abate as the indicator reverses ahead of overbought territory.
• As a result, EUR/USD may continue to track the May range as it struggles to extend the series of higher highs and lows from the monthly low (1.2104), with a move below the Fibonacci overlap around 1.2140 (50% retracement) to 1.2170 (78.6% expansion) bringing the 1.2080 (78.6% retracement) region back on the radar.
• Next area of interest comes in around 1.2010 (100% expansion), with a break of the May low (1.1986) opening up the Fibonacci overlap around 1.1920 (78.6% expansion) to 1.1970 (23.6% expansion).
• Need a break/close above the overlap around 1.2220 (38.2% expansion) to 1.2260 (161.8% expansion) to open up the 1.2320 (23.6% retracement) region, with the next area of interest coming in around 1.2370 (61.8% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong