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Euro Resilience to Persist as Market Behavior Continues to Shift

Euro Resilience to Persist as Market Behavior Continues to Shift

2017-05-24 18:22:00
David Song, Strategist

The Euro has staged an impressive rally following the French election, and the resilience may persist over the coming months especially as German Chancellor Angela Merkel warns the single-currency remains ‘too weak.’

With the European Central Bank (ECB) on course to conclude its quantitative easing (QE) program in December, the threat of a ‘taper tantrum’ appears to have sapped the bearish sentiment surrounding the Euro, and EUR/USD may continue to retrace the decline from the previous year as European Central Bank (ECB) officials warn of an upcoming shift in monetary policy.

Indeed, forecasts for ‘EUR/USD-parity’ have largely disappeared as the exchange rate breaks to fresh 2017-highs in May, and the pair may continue to take out the topside hurdles especially as the greenback gives back the advance following the U.S. Presidential election. At the same time, a June rate-hike from the Federal Open Market Committee (FOMC) may fail to prop up the dollar as officials see a terminal fed funds rate close to 3.00%, and the reserve currency stands at risk for a larger correction should the central bank refrain from revealing a more detailed exit strategy.

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EUR/USD Daily Chart

Broader outlook for EUR/USD has become more constructive in 2017 as the pair breaks out of the downward trend carried over from the previous year, and the euro-dollar exchange rate may continue to retrace the decline from the 2016-high (1.1616) as price & the Relative Strength Index (RSI) extend the bullish formation from December.

However, the lack of momentum to test the November-high (1.1299) may stoke a near-term pullback in EUR/USD especially as the momentum indicator highlights a textbook ‘sell-signal’ and falls back from overbought territory. In turn, the recent sequence of lower highs & lows may gather pace going into the end of the month, but the broader outlook favors opportunities to buy-dips in EUR/USD as the shift in market behavior continues to unfold.

IG Sentiment

Retail trader data shows 27.8% of traders are net-long EUR/USD with the ratio of traders short to long at 2.6 to 1. In fact, traders have remained net-short since April 18 when EUR/USD traded near 1.06163; price has moved 5.3% higher since then. The number of traders net-long is 1.4% higher than yesterday and 2.4% higher from last week, while the number of traders net-short is 4.4% higher than yesterday and 1.9% higher from last week. For more information on retail sentiment, check out the new gauge developed by DailyFX based on trader positioning.

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--- Written by David Song, Currency Analyst

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.