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EUR/USD Rebound Unravels amid Failure to Hold Above 50-Day SMA

EUR/USD Rate Talking Points

EUR/USD snaps the series of higher highs and lows carried over from last week as the update to the US Consumer Price Index (CPI) fuels speculation for another 75bp Federal Reserve rate hike, and the exchange rate may continue to give back the rebound from the yearly low (0.9864) as it appears to be tracking the negative slope in the 50-Day SMA (1.0107).

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EUR/USD Rebound Unravels amid Failure to Hold Above 50-Day SMA

EUR/USD may largely mirror the price action from last month as it struggles to hold above the moving average, and the exchange rate stage another attempt to test the December 2002 low (0.9859) as the European Central Bank (ECB) insists that the decisions taken at the September meeting “frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to our two per cent medium-term target.”

Meanwhile, the stickiness in consumer prices may encourage the Federal Open Market Committee (FOMC) to retain its current approach in combating inflation as Vice-Chair Lael Brainard argues that “it will be necessary to see several months of low monthly inflation readings to be confident that inflation is moving back down to 2 percent,” and EUR/USD may continue to face headwinds ahead of the Fed interest rate decision on September 21 as the CME FedWatch Tool now reflects a 100% probability for a 75bp rate hike.

Image of CME FedWatch Tool

Source: CME

At time same time, the CME FedWatch Tool indicates a greater than 30% chance for a 100bp rate hike as the FOMC struggles to curb inflation, and it remains to be seen if Chairman Jerome Powell and Co. will projected a steeper path for US interest rates as the central bank is slated to update the Summary of Economic Projections (SEP).

Until then, EUR/USD may continue to track the negative slope in the 50-Day SMA (1.0107) as it struggles to hold above the moving average, while the tilt in retail sentiment looks poised to persist as traders have been net-long the pair for most of 2022.

Image of IG Client Sentiment for EUR/USD rate

The IG Client Sentiment report shows 63.08% of traders are currently net-long EUR/USD, with the ratio of traders long to short standing at 1.71 to 1.

The number of traders net-long is 7.12% higher than yesterday and 24.01% lower from last week, while the number of traders net-short is 16.12% lower than yesterday and 18.85% higher from last week. The decline in net-long interest has helped to alleviate the crowding behavior as 64.81% of traders were net-long EUR/USD last week, while the rise in net-short position comes as the exchange rate snaps the series of higher highs and lows carried over from last week.

With that said, EUR/USDmay face a further decline ahead of the Fed rate decision amid expectations for another 75bp rate hike, and the exchange rate may continue to give back the rebound from the yearly low (0.9864) as it appears to be tracking the negative slope in the 50-Day SMA (1.0107).

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EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • EUR/USD trades back below the 50-Day SMA (1.0107) following the failed attempt to test the 1.0220 (161.8% expansion) region, and the exchange rate may track the negative slope in the moving average to largely mirror the price action from last month.
  • Failure to defend the 1.0070 (161.8% expansion) area brings the Fibonacci overlap around 0.9910 (78.6% retracement) to 0.9950 (50% expansion) back on the radar, with a move below the yearly low (0.9864) raising the scope for a run at the December 2002 low (0.9859).
  • Next area of interest comes in around the October 2002 low (0.9685), but lack of momentum to break/close below the overlap around 0.9910 (78.6% retracement) to 0.9950 (50% expansion) may keep EUR/USD within the monthly range.

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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