EUR/USD Clears Monthly Opening Range as ECB Shuns Euro Intervention

EUR/USD Rate Talking Points

EUR/USD struggles to retain the advance from the previous week as the US Dollar recovers on the back of waning risk appetite, but the exchange rate may continue to retrace the decline the yearly high (1.2011) as it clears the monthly opening range, while the Relative Strength Index (RSI) breaks out of the downward trend carried over from late July.

EUR/USD Clears Monthly Opening Range as ECB Shuns Euro Intervention

EUR/USD consolidates even though a growing number of European Central Bank (ECB) officials tame speculation for a currency intervention, and swings in risk appetite may continue to sway the exchange rate as the US Dollar displays an inverse relationship with investor confidence.

However, the advance from the monthly low (1.1696) may gather pace as the ECB appears to be in no rush to alter the path for monetary policy, with Chief Economist Philip Lane stating that it’s “not so much that the central bank is looking at the exchange rate per se, it’s the implications for the European economy and for inflation” during an interview with the Wall Street Journal.

Lane goes onto say that “the exchange rate is important but the bigger global issue is the state of global demand, and that has recovered maybe better than expected,” and the comments largely underscore the remarks from Vice-President Luis de Guindos, who warned that “it would be suicidal to enter into any sort of dispute about exchange rates.”

It seems as though the ECB will remain on the sidelines board member Lane argues that “under current conditions it’s important that fiscal policy is active and responds to the needs of the economy,” and the Governing Council may stick to the same script at its next meeting on October 29 as “our baseline is still a lot of recovery in the fourth quarter, a lot of recovery next year, with the elimination of the whole gap in 2022.

In turn, key market trends may influence EUR/USD as the ECB relies on its current tools to support the Euro Area, and it looks as though the tilt in retail sentiment will also persist in October as traders have been net-short the pair since mid-May.

The IG Client Sentiment report shows 36.53% of traders are net-long EUR/USD, with the ratio of traders short to long standing at 1.74 to 1. The number of traders net-long is 20.72% higher than yesterday and 3.41% higher from last week, while the number of traders net-short is 2.03% lower than yesterday and 6.16% lower from last week.

The rise in net-long position along with the decline in net-short interest has helped to alleviate the crowding behavior in EUR/USD as only 35.37% of traders were net-long the pair last week, but the tilt in retail sentiment looks poised to persist even though the ECB appears to be in no rush to alter the path for monetary policy.

With that said, swings in risk appetite may continue to sway EUR/USD as key market themes carry into October, and the pullback from the yearly high (1.2011) may prove to be an exhaustion in the bullish trend rather than a change in market behavior as the Relative Strength Index (RSI) breaks out of the downward trend carried over from late July.

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EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • Keep in mind, a ‘golden cross’ materialized in EUR/USD towards the end of June as the 50-Day SMA (1.1801) crossed above the 200-Day SMA (1.1271), with the moving averages still tracking the positive slopes from earlier this year.
  • At the same time, a bull flag formation panned out following the failed attempt to close below the 1.1190 (38.2% retracement) to 1.1220 (78.6% expansion) region in July, with the Relative Strength Index (RSI) helping to validate the continuation pattern as the oscillator bounced along trendline support to preserve the upward trend from March.
  • However, the EUR/USD rally stalled following the failed attempt to close above the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region, with the RSI highlighting a similar dynamic as it slipped below 70 to ultimately break trendline support.
  • A similar scenario materialized in September even though EUR/USD traded to a fresh yearly high (1.2011) at the start of the month, with the exchange rate taking out the August low (1.1696) after staging another failed attempt to close above the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region.
  • Nevertheless, the pullback from the yearly high (1.2011) may prove to be an exhaustion in the bullish price action rather than a change in trend amid the failed attempt to break/close below the 1.1600 (61.8% expansion) to 1.1640 (23.6% expansion) region, with the RSI highlighting a similar dynamic as it reverses ahead of oversold territory and breaks of the downward trend carried over from the end of July.
  • The advance from the monthly low (1.1696) may gather pace as EUR/USD clears the monthly opening range, but need a close above the Fibonacci overlap around 1.1810 (61.8% retracement) to 1.1850 (100% expansion) to bring the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region on the radar.
  • The 2020 high (1.2011) comes up next followed by the 1.2080 (78.6% retracement) to 1.2140 (50% retracement) area.

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— Written by David Song, Currency Strategist

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