EUR/USD struggled to hold its ground following the European Central Bank’s (ECB) June 8 interest rate decision as the Governing Council lowered its inflation forecast and intends to run its EUR 60B/month asset-purchase program for the foreseeable future. However, President Mario Draghi and Co. appear to be gradually changing their tune as officials now anticipate euro-area interest rates to ‘remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases.

Even though the ECB remains in no rush to remove the zero-interest rate policy (ZIRP), central bank officials appear to be soften the dovish outlook for monetary policy as they anticipate a stronger recovery, and the Governing Council may show a greater willingness to wind down its quantitative easing (QE) program over the coming months as ‘the risks surrounding the euro area growth outlook are considered to be broadly balanced.’ With that said, the euro-dollar exchange rate may continue to retrace the decline from earlier this year as the ECB shows a greater willingness to gradually move away from its easing-cycle.

In regards with the Federal Reserve, the fresh updates from Chair Janet Yellen and Co. may spark a larger correction in EUR/USD as the committee appears to be on course to deliver three rate-hikes in 2017, and the fresh batch of central bank rhetoric may heighten the appeal of the greenback should the Federal Open Market Committee (FOMC) unveil a more detailed exit-strategy. Nevertheless, the Fed may project a more shallow path for the benchmark interest rate as officials note ‘market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed on balance,’ and the greenback may come under pressure if the FOMC looks to further delay the normalization cycle.

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EUR/USD Daily

EUR/USD Daily Chart

The broader outlook for EUR/USD remains constructive amid the shift in market behavior, and the pair may attempt to mark fresh monthly highs over the coming days as long as it holds above the Fibonacci overlap around 1.1140 (23.6% expansion) to 1.1160 (38.2% expansion). However, the lack of momentum to test the November-high (1.1299) raises the risk for a near-term pullback in EUR/USD especially as the Relative Strength Index (RSI) comes off of overbought territory, with a break/close below the near-term support zone opening up the next downside region of interest around 1.0980 (50% retracement) to 1.1020 (50% retracement).

IG Sentiment

Retail trader data shows 29.6% of traders are net-long EUR/USD with the ratio of traders short to long at 2.37 to 1. In fact, traders have remained net-short since April 18 when EUR/USD traded near 1.06045; price has moved 6.2% higher since then. The number of traders net-long is 5.8% higher than yesterday and 4.9% higher from last week, while the number of traders net-short is 0.5% higher than yesterday and 2.7% lower 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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