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EUR/USD may continue to exhibit a bullish behavior as the European Central Bank (ECB) appears to be on course to taper its quantitative easing (QE) program, but the pair may face a larger pullback ahead of the Federal Open Market Committee (FOMC) interest rate decision on September 20 as it starts to carve a series of lower highs & lows.
Even though the ECB continues to carry out its QE program, it seems as though the Governing Council will gradually move away from its easing-cycle as officials pledge preserve the zero-interest rate policy (ZIRP) ‘well past the horizon of our net asset purchases.’ The fresh remarks from President Mario Draghi and Co. suggest the central bank will alter the monetary policy outlook as ‘the current positive cyclical momentum increases the chances of a stronger than expected economic upswing,’ and it seems as though the Governing Council will continue to tolerate the appreciation in the Euro exchange rate as ‘the ongoing economic expansion provides confidence that inflation will gradually head to levels in line with our inflation aim.’
In contrast, the FOMC may show a greater willingness to carry the current policy into 2018 especially as Hurricane Harvey and Irma disrupt the economic recovery. In turn, Chair Janet Yellen and Co. may cast a cautious outlook and highlight a more shallow path for the Fed Funds rate as U.S. households continue to face subdued wage growth.
EUR/USD Daily Chart
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EUR/USD may face a larger pullback after failing to test the 1.2130 (50% retracement) hurdle as it breaks the monthly opening range and initiates a fresh series of lower highs & lows. A close below 1.1860 (161.8% expansion) may open up the 1.1770 (100% expansion) area, with the next region of interest coming in around 1.1670 (50% retracement), which lines up with the August-low (1.1662). EUR/USD may face a more meaningful correction should both price and the Relative Strength Index (RSI) struggle to preserve the bullish formations carried over from earlier this year.
EUR/USD Retail Sentiment
Retail trader data shows 36.8% of traders are net-long EUR/USD with the ratio of traders short to long at 1.72 to 1. In fact, traders have remained net-short since April 18 when EUR/USD traded near 1.08475; price has moved 9.8% higher since then. The number of traders net-long is 3.5% lower than yesterday and 36.1% higher from last week, while the number of traders net-short is 6.6% lower than yesterday and 21.2% lower from last week.
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--- Written by David Song, Currency Analyst
To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.
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