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Euro Rates Rally Ahead of ECB Meeting as US Dollar Hit by Trade Wars

Euro Rates Rally Ahead of ECB Meeting as US Dollar Hit by Trade Wars

2019-04-09 12:42:00
Christopher Vecchio, CFA, Senior Strategist
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Talking Points

- Talks of an imminent US recession have disappeared as the US Treasury yield curve has moved away from inversion territory.

- The April ECB meeting on Wednesday is giving traders a reason to lift Euro prices ahead of time.

- Retail traders are starting to change their tune on the US Dollar, and in turn, EURUSD may rally.

Looking for longer-term forecasts on the US Dollar? Check out the DailyFX Trading Guides.

The US Dollar (via the DXY Index) is seeing more weakness in the run up to the supersaturated economic calendar on Wednesday, despite the fact that Tuesday’s slate of events is essentially blank (JOLTS jobs report is interesting for economists, not so much for traders). Brexit negotiations are on hold as leaders get set to gather for the emergency summit tomorrow.

US-led Trade Wars Persist

Elsewhere, the US-China trade war talks have simmered, particularly as the Trump administration grapples with how to properly enforce the agreement in China. But a new front may be opening up with the EU over Airbus and Boeing – this may prove to be a new issue traders are forced to deal with in the news moving forward.

US Recession Concerns Have Quieted Down

As the US Dollar has weakened in recent days, it’s worth noting that little of it has to do with concerns about the US economy slipping into recession. Much ado about nothing, it seems: all of the sirens about the US Treasury yield curve inverting have seemingly disappeared. It’s worth noting that long-end US Treasury yields have rebounded in recent days, as seen by the 10-year yield below:

US Treasury 10-year Yield: Daily Chart (June 2016 to April 2019) (Chart 1)

us treasury 10-year yield chart, us10y chart

Perhaps more importantly, the US Treasury yield curve is no longer in ‘inversion’ territory. That is, the spread between the 3-month and 5-year yields, and the spread between the 3-month and 10-year yields are longer below zero.

US Treasury Yield Curve: 3m10s (December 2017 to April 2019) (Chart 2)

us treasury yield curve, us yield curve

It’s worth reiterating again, as we outlined in the Why Does the US Yield Curve Inversion Matter? note, that the yield curve must stay inverted for two consecutive quarters before becoming a valid recessionary signal; we didn’t even have two consecutive days in the 3m10s spread below zero. Any suggestions that the US Dollar is being pressured by near-term recession fears are disingenuous.

DXY Index Technical Forecast: Daily Price Chart (March 2018 to April 2019) (Chart 3)

dxy index chart, us dollar chart, us dollar price forecast, dxy index forecast

Following failure to clear 97.37 to the topside last week, the bearish evening star candle cluster identified yesterday appears to have taken shape. The topping pattern points to more weakness for the US Dollar in the near-term; the DXY Index has already started to undercut the daily 8-, 13-, and 21-EMA envelope. Given that the two-month range remains in place, a reversal back to range lows would call for a move closer to 95.80 over the coming days/weeks.

April ECB Meeting Takes Center Stage on “Super Wednesday”

The economic calendar is rather quiet today, but it is supersaturated with ‘high’ rated events tomorrow, so much so that many analysts have dubbed it a “Super Wednesday” of sorts. A plethora of important data from G7 countries will be released, and key events will take place: February UK GDP; the March US CPI report; and the March Fed meeting minutes.

But it’s the April ECB meeting that will take center stage. In the weeks since ECB President Mario Draghi announced the third TLTRO program, several ECB officials, including Draghi himself, have opined on the downside risks of prolonged negative interest rates. It’s possible that the April ECB meeting yields a central bank that indicates that no further cuts are coming, even if it has seemingly eliminated the possibility of a hike in 2019. See the full April ECB meeting forecast here.

EURUSD Technical Forecast: Daily Price Chart (June 2018 to April 2019) (Chart 4)

eurusd price chart, eurusd price forecast, eurusd technical forecast

The bearish technical structure has been invalidated in recent days, with EURUSD price turning higher through the daily 8-, 13-, and 21-EMA envelope. While both daily MACD and Slow Stochastics are in bearish territory, they have started to turn higher. It’s worth noting that the recent ‘lower low’ in Slow Stochastics seen in April relative to March did not coincide with EURUSD price moving to a ‘lower low’; in this context, such divergence typically indicates exhaustion to the downside. Accordingly, traders may see EURUSD continue to trade higher in the run up to the April ECB meeting.

IG Client Sentiment Index: EURUSD (April 9, 2019) (Chart 5)

igcs eurusd, ig client sentiment index, eurusd chart

Retail trader data shows 65.6% of traders are net-long with the ratio of traders long to short at 1.91 to 1. In fact, traders have remained net-long since Mar 26 when EURUSD traded near 1.1315; price has moved 0.4% lower since then. The number of traders net-long is 7.4% lower than yesterday and 10.2% lower from last week, while the number of traders net-short is 34.0% higher than yesterday and 38.5% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURUSD prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current EURUSD price trend may soon reverse higher despite the fact traders remain net-long.

FX TRADING RESOURCES

Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail at cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

View our long-term forecasts with the DailyFX Trading Guides

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

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