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Broader outlook for EUR/USD remains constructive especially as the pair fills the gap from January 2015 (1.2000 down to 1.1955), andthe shift in market behavior may continue to unfold over the remainder of the year should the European Central Bank (ECB) start to taper its asset-purchases ahead of the December deadline.
A rebound in the Euro-Zone Consumer Price Index (CPI) may heighten the appeal of the single-currency as it encourages the central bank to move away from its highly accommodative policy stance, and the fresh developments coming out of the ECB on September may heavily impact the near-term outlook for EUR/USD as President Mario Draghi and Co. decide the fate of the quantitative easing (QE) program. The Governing Council may taper its asset-purchases ahead of 2018 as officials note ‘reflationary forces, which referred to the recovery of inflation from levels below its long-term trend, had replaced risks of deflation,’ and the euro-dollar exchange rate may continue to exhibit a bullish behavior if the ECB shows a greater willingness to remove the zero-interest rate policy (ZIRP) over the coming months.
Nevertheless, the near-term rally appears to be unraveling ahead of the ECB meeting as the ongoing appreciation in the single-currency impedes on the central bank’s ability to achieve its one and only mandate for price stability. In turn, the Euro may face a bearish fate should President Draghi and Co. jawbone the single currency and look to carry the non-standard measures into 2018.
EUR/USD Daily Chart
Broader outlook remains constructive as a bull-flag formation pans out, while both price and the Relative Strength Index (RSI) preserve the upward trends from late-2016. However, the RSI appears to be deviating with price as it fails to push to fresh 2017-highs, with EUR/USD at risk for a near-term correction as the momentum indicator turns around ahead of overbought territory.
As a result, downside targets are on the radar going into September, with the 1.1770 (100% expansion) region largely lining up with trendline support. The key hurdle comes in around 1.1670 (50% retracement), which coincides with the August-low (1.1662).
EUR/USD Retail Sentiment
Retail trader data shows 31.3% of traders are net-long EUR/USD with the ratio of traders short to long at 2.19 to 1. In fact, traders have remained net-short since April 18 when EUR/USD traded near 1.08143; price has moved 10.0% higher since then. The percentage of traders net-long is now its highest since August 23 when EUR/USD traded near 1.18108. The number of traders net-long is 19.3% higher than yesterday and 0.2% lower from last week, while the number of traders net-short is 13.4% lower than yesterday and 2.5% lower from last week.
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--- Written by David Song, Currency Analyst
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