EUR/USD Rebound Takes Shape Amid Failure to Test Monthly Low

EUR/USD Rate Talking Points

EUR/USD bounce back from the weekly low (1.1720) even though a growing number of European Central Bank (ECB) officials pledge to further support the Euro Area, and the exchange rate may continue to retrace the decline from 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 Rebound Takes Shape Amid Failure to Test Monthly Low

EUR/USD pares the decline from earlier this month as the Euro outperforms against most of its major counterparts, and the lack of momentum to test the monthly low (1.1696) undermines the recent series of lower highs and lows in the exchange rate as the ECB appears to be in no rush to alter the path for monetary policy.

A recent speech by ECB board member Francois Villeroy de Galhau suggests the central bank will rely on its current tools to support the Euro Area as the current stance is appropriate,” with the official going onto say that the Governing Council “will be ready to act further if needed.”

It seems as though the ECB will retain a dovish forward guidance as the central bank rules out a V-shape recovery, but President Christine Lagarde and Co. may stick to the sidelines at the next interest rate decision on October 29 as the account of the September meeting reveals that the “PEPP (Pandemic Emergency Purchase Programme) envelope would likely have to be used in full to provide the necessary accommodation to offset the downward impact of the pandemic on the path of inflation.”

In turn, the ECB may continue to tweak its current tools as “it was noted that further cuts in policy rates and changes to the conditions of the TLTROs (Targeted Longer-Term Refinancing Operations) were also part of the toolkit for providing additional monetary policy accommodation, if necessary,” and little indications for more non-standard measures may keep current market trends in place as a growing number of Governing Council officials tame speculation for a Euro intervention.

At the same time, the tilt in retail sentiment looks poised to persist even though the Federal Reserve’s balance sheet approaches the peak from June as traders have net-short EUR/USD since mid-May.

The IG Client Sentiment report shows 37.24% of traders are currently net-long EUR/USD, with the ratio of traders short to long standing at 1.69 to 1. The number of traders net-long is 11.19% lower than yesterday and 2.06% higher from last week, while the number of traders net-short is 10.99% higher than yesterday and 7.21% lower from last week.

The rise in net-long position comes as EUR/USD appears to be reversing course ahead of the monthly low (1.1696), while the decline in net-short interest has helped to alleviate the tilt in retail sentiment as 36.53% of traders were net-long the pair earlier this week.

With that said, the crowding behavior in EUR/USD looks poised to persist over the remainder of the month, 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 (1.1795) crossed above the 200-Day SMA (1.1277), with the longer-term moving average still tracking the positive slope 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 lack of momentum 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 opening range for October, 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

Follow me on Twitter at @DavidJSong

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