Bullish EUR/USD Behavior Becomes Exhausted Ahead of January-2015 Gap
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EUR/USD may continue to gain ground over the coming months as the European Central Bank (ECB) appears to be on course to taper the quantitative easing (QE) program ahead of the December deadline, but the pair stands at risk of facing a near-term pullback as it fails to fill-in the gap from January 2015 (1.2000 down to 1.1955).
In light of the market reaction to the better-than-expected U.S. Non-Farm Payrolls (NFP) report, EUR/USD may continue to come off of the monthly-high (1.1910) as the pickup in household earnings accompanied by the ongoing expansion in job growth puts pressure on the Federal Open Market Committee (FOMC) to further normalize monetary policy in 2017. As a result, Fed officials may show a greater willingness to implement another rate-hike later this year, and the FOMC may adopt a more aggressive approach in normalizing monetary policy as ‘the Committee expects to begin implementing its balance sheet normalization program relatively soon.’
However, the fresh forecasts coming out at the next Fed interest rate decision on September 20 may dampen the appeal of the greenback as Chair Janet Yellen argues ‘the federal funds rate would not have to rise all that much further to get to a neutral policy stance,’ and the dollar remains at risk of facing additional headwinds in the second-half of the year especially as the outlook for fiscal policy becomes increasingly clouded with uncertainty.
EUR/USD Daily Chart
Failure to fill the gap from January-2015 (1.2000 down to 1.1955) may spark a near-term correction in EUR/USD especially as the pair fails to preserve the August opening range and slips to fresh monthly lows. At the same time, the Relative Strength Index (RSI)highlights a similar dynamic as the oscillator falls back from overbought territory, with a close below the 1.1770 (100% expansion) hurdle raising the risk for a move back towards 1.1670 (50% retracement). Next downside region of interest coming in around 1.1480 (78.6% expansion) to 1.1500 (78.6% expansion) followed by the overlap around 1.1390 (61.8% retracement) to 1.1400 (61.8% expansion).
EUR/USD Retail Sentiment
Retail trader data shows 27.4% of traders are net-long EUR/USD with the ratio of traders short to long at 2.65 to 1. In fact, traders have remained net-short since April 18 when EUR/USD traded near 1.06524; price has moved 10.4% higher since then. The number of traders net-long is 10.3% lower than yesterday and 1.4% higher from last week, while the number of traders net-short is 7.9% lower than yesterday and 4.5% lower from last week.
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--- Written by David Song, Currency Analyst
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