Euro Holds June Range Despite Reports of ECB Inflation Downgrade

Talking Points:

- AUD/USD Breakout Gathers Pace Following Upbeat Australia GDP Report.

- Euro Holds June Opening Range Despite Reports of ECB Inflation Downgrade.

The Australian dollar extends the advance from earlier this week following the better-than-expected 1Q Gross Domestic Product (GDP), and the aussie-dollar exchange rate may continue to track higher over the coming days as it breaks out of a bearish formation.

Keep in mind, the broader outlook for AUD/USD remains relatively flat as the Reserve Bank of Australia (RBA) appears to be in no rush to lift the official cash rate off of the record-low, and the pair may continue to operate within the 2016-range as Governor Philip Lowe and Co. persistently endorse a wait-and-see approach for monetary policy.

AUD/USD Daily

Chart - Created Using Trading View

• Topside targets are back in focus for AUD/USD following the failed attempt to test the May low (0.7329), and the pair may extends the recent series of higher highs & lows as it shows a more meaningful break of channel resistance.
• The Relative Strength Index (RSI) highlighting a similar dynamic as it clears the bearish formation carried over from earlier this year, but will keep a close eye on the oscillator as it climbs towards overbought territory.
• Nevertheless, AUD/USD is quickly coming up against the first topside hurdle around 0.7580 (38.2% retracement) to 0.7600 (23.6% retracement), with the next region of interest coming in around 0.7650 (50% expansion) to 0.7680 (23.6% retracement).

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EUR/USD struggles to hold its ground ahead of the European Central Bank (ECB) interest rate decision amid reports the Governing Council will reduce its inflation forecast through 2019, and the single-currency stands at risk of facing a kneejerk reaction as the Governing Council appears to be on course to preserve the zero-interest rate policy (ZIRP) throughout 2017.

Indeed, the ECB is likely to reiterate ‘a very substantial degree of monetary accommodation is still needed for underlying inflation pressures to build up’ as the central bank struggles to achieve its one and only mandate for price stability, but President Mario Draghi and Co. may highlight a greater willingness to further reduce its asset-purchases over the coming months as the quantitative easing (QE) program is set to expire in December. In turn, a gradual adjustment of the policy outlook may ultimately trigger a bullish reaction in the Euro should the ECB curb speculation for additional monetary support.

EUR/USD Daily

Chart - Created Using Trading View

• Even though the Euro remains under pressure, EUR/USD may range-bound conditions ahead of the ECB interest rate decision as it preserves the monthly opening range, with the broader outlook tilted to the topside as price & the Relative Strength Index (RSI) preserve the bullish formations carried over from late-2016.
• Nevertheless, failure to test the November-high (1.1299) raises the risk for a near-term correction especially as the RSI pulls away from overbought territory, with a break of the monthly low (1.1202) opening up the first downside area of interest around 1.1130 (61.8% retracement) to 1.1160 (38.2% expansion) followed by the Fibonacci overlap from 1.0980 (50% retracement) to 1.1020 (50% retracement).

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• Retail trader data shows 39.2% of traders are net-long AUD/USD with the ratio of traders short to long at 1.55 to 1. The percentage of traders net-long is now its lowest since March 26 when AUD/USD traded near 0.76285. The number of traders net-long is 12.2% lower than yesterday and 22.3% lower from last week, while the number of traders net-short is 13.7% higher than yesterday and 11.8% higher from last week.
• Retail trader data shows 29.0% of traders are net-long EUR/USD with the ratio of traders short to long at 2.45 to 1. In fact, traders have remained net-short since April 18 when EUR/USD traded near 1.06661; price has moved 5.6% higher since then. The number of traders net-long is 10.8% lower than yesterday and 9.7% lower from last week, while the number of traders net-short is 4.6% lower than yesterday and 6.9% lower from last week.

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--- Written by David Song, Currency Analyst

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