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EUR/USD Carves Inside-Day; Less-Dovish ECB to Fuel Shift in Behavior

EUR/USD Carves Inside-Day; Less-Dovish ECB to Fuel Shift in Behavior

2017-06-05 17:00:00
David Song, Strategist
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Talking Points:

- Sterling Weathers Another Terror Attack; GBP/USD Clings to Bullish Formation Ahead of U.K. Election.

- EUR/USD Carves Inside-Day (Harami); Less-Dovish ECB to Fuel Shift in Market Behavior.

DailyFX Table

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

GBP/USD

1.2922

1.2941

1.2853

67

88

The British Pound weathers another terror attack in the U.K., with GBP/USD climbing to a fresh monthly high of 1.2940, and the pair may continue to gain ground ahead of the U.K. snap election on June 8 as it appears to be breaking out of a narrow range.

Hopes for a more unified government may keep Sterling afloat as opinion polls point to a Conservative majority, but the threat of a hung Parliament may undermine the recent recovery in the British Pound especially as the economic outlook remains clouded with high uncertainty. With that said, the Bank of England (BoE) may merely try to buy more time at the next policy meeting on June 15, and Governor Mark Carney and Co. may continue tame interest-rate expectations as ‘consumption growth will be slower in the near term than previously anticipated.’

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using Trading View

  • GBP/USD may stage a larger recovery as it threatens the range-bound price action from the previous week, and the pair may work its way back towards the May high (1.3048) as it largely preserves the upward trend carried over from March; break/close above the 1.2950 (23.6% expansion) hurdle may spur a more meaningful run at the Fibonacci overlap around 1.3090 (38.2% retracement) to 1.3120 (78.6% retracement).
  • Topside targets will be favored as long as GBP/USD trades above the 50-Day SMA (1.2773), which largely lines up with trendline support, but the Relative Strength Index (RSI) highlights a different dynamic as the oscillator fails to retain the bullish formation from earlier this year, with the first downside region of interest coming in around 1.2630 (38.2% expansion) to 1.2680 (50% retracement).

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Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

EUR/USD

1.1252

1.1284

1.1234

25

50

The Euro lags behind its major counterparts, with EUR/USD at risk for a larger pullback ahead of the European Central Bank (ECB) interest rate decision on June 8 as it appears to be carving a bearish inside-day (harami).

The ECB policy meeting takes center stage as the central bank is scheduled to release its updated projections, and President Mario Draghi and Co. may keep the door to further embark on the easing-cycle as officials warn ‘a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up and support headline inflation in the medium term.’ However, the Governing Council may soften its dovish tone as the central bank remains on course to conclude its quantitative easing (QE) program in December, and a material adjustment to the policy outlook may fuel a further shift in market behavior should the ECB show a greater willingness to wind down its asset-purchases over the coming months.

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using Trading View

  • Broader outlook for EUR/USD remains constructive as price & the Relative Strength Index (RSI) retain the bullish trends carried over from late-2016, and pair may continue to retrace the decline from the 2016-high (1.1616) as the shift in market behavior continues to unfold; next topside hurdle comes in around 1.1330 (23.6% expansion) to 1.1340 (78.6% retracement).
  • However, the bearish inside-day (harami) candle may foster a near-term pullback in the euro-dollar exchange rate especially as the RSI struggles to push into oversold territory, with a move below 1.1220 (61.8% retracement) opening up the Fibonacci overlap around 1.1130 (61.8% retracement) to 1.1160 (38.2% expansion).

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IG Sentiment
  • Retail trader data shows 42.1% of traders are net-long GBP/USD with the ratio of traders short to long at 1.37 to 1. In fact, traders have remained net-short since April 12 when GBP/USD traded near 1.24364; price has moved 3.9% higher since then. The number of traders net-long is 11.9% higher than yesterday and 9.9% lower from last week, while the number of traders net-short is 6.9% higher than yesterday and 7.5% higher from last week.
  • Retail trader data shows 29.7% of traders are net-long EUR/USD with the ratio of traders short to long at 2.36 to 1. In fact, traders have remained net-short since April 18 when EUR/USD traded near 1.06045; price has moved 6.1% higher since then. The number of traders net-long is 24.6% higher than yesterday and 4.0% higher from last week, while the number of traders net-short is 1.3% lower than yesterday and 1.2% higher 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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