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Shift in Euro Behavior to Persist as ECB Officials Drop Dovish Tone

Shift in Euro Behavior to Persist as ECB Officials Drop Dovish Tone

Talking Points:

- EUR/USD Climbs to Fresh 2017-High on Upbeat ECB Rhetoric; Greece Taps Bond Market.

- USD/JPY Bullish Outlook Mired by Wait-and-See FOMC, Less-Dovish BoJ.

- USD/JPY Retail Net-Longs Jump 30% from Previous Week.

DailyFX Table
TickerLastHighLowDaily Change (pip)Daily Range (pip)

EUR/USD rallies to a fresh 2017-highs as European Central Bank (ECB) officials adopt an improved outlook for the monetary union, while Greece issues new bonds for the first time since 2014.

Even though the ECB remains in no rush to remove the zero-interest rate policy (ZIRP), the shift in euro-dollar behavior may persist throughout the second-half of the year as Governing Council member Yves Mersch drops the dovish outlook and anticipates underlying inflation to gradually pick up as ‘reflationary forces are at play.’ With the quantitative easing (QE) program set to expire in December, positive developments coming out of the euro-area may encourage President Mario Draghi and Co. to wind down the non-standard measure over the coming months especially as the central bank boosts its growth forecast for policy horizon.

In turn, EUR/USD may continue to exhibit a bullish behavior over the near-term, with the pair quickly approaching the August 2015-high (1.1714).


EUR/USD Daily Chart

Chart - Created Using Trading View

  • Topside targets are back in focus for EUR/USD as it climbs to a fresh 2017-high (1.1712), while the Relative Strength Index (RSI) holds above 70; may see the euro-dollar exchange rate continue to gain ground as the momentum indicator appears to be pushing deeper into overbought territory.
  • A close above 1.1670 (78.6% expansion) hurdle may open up the next topside region of interest around 1.1810 (61.8% retracement) to 1.1860 (161.8% expansion).
TickerLastHighLowDaily Change (pip)Daily Range (pip)

USD/JPY bounces back from the monthly-low (110.62), with U.S. Treasury Yields exhibiting a similar behavior, but the Federal Open Market Committee (FOMC) interest rate decision may do little to alter the near-term outlook for the dollar-yen exchange rate as Chair Janet Yellen and Co. are widely anticipated to keep the benchmark interest rate on hold.

Even though the Federal Reserve appears to be on course to further normalize monetary policy in 2017, the committee may soften its hawkish tone and attempt to buy more time as the central bank struggles to achieve the 2% target for inflation. At the same time, the Bank of Japan (BoJ) appears to be slowly changing its tune as officials note a ‘growing interest in the so-called exit,’ and Governor Haruhiko Kuroda and Co. may show a greater willingness to gradually move away from its asset-purchase program amid the ‘moderate expansion’ in economic activity.

Keep in mind, the BoJ remains in no rush to remove the Quantitative/Qualitative Easing (QQE) program with Yield-Curve Control as Governor Kuroda and Co. now anticipate to achieve the 2% inflation-target in fiscal year 2019, but a further shift in the monetary policy outlook may sap the bearish sentiment surrounding the Japanese Yen as the central bank appears to be approaching the end of its easing-cycle.


USD/JPY Daily Chart

Chart - Created Using Trading View

  • USD/JPY may continue to grind towards the June-low (108.80) as it trades within a descending channel, but the recent development in the Relative Strength Index (RSI) raises the risk for range-bound conditions as the oscillator deviates from price and threatens the bearish formationfrom earlier this month.
  • Failure to extend the recent string of lower-highs may push USD/JPY back towards the Fibonacci overlap around 112.40 (61.8% retracement) to 112.80 (38.2% retracement), with near-term resistance coming in around 113.80 (23.6% expansion) to 114.30 (23.6% retracement).
  • Nevertheless, a move back below the 111.10 (61.8% expansion) hurdle may open up the 109.40 (50% retracement) to 109.90 (78.6% expansion), with the June-low (108.80) still on the radar, which sits just above the Fibonacci overlap coming in at 108.30 (61.8% retracement) to 108.40 (100% expansion).
FX Sentiment

Track Retail Sentiment with the New Gauge Developed by DailyFX Based on Trader Positioning

  • Retail trader data shows 24.0% of traders are net-long EUR/USD with the ratio of traders short to long at 3.17 to 1. In fact, traders have remained net-short since April 18 when EUR/USD traded near 1.06785; price has moved 9.5% higher since then. The number of traders net-long is 15.9% higher than yesterday and 4.1% higher from last week, while the number of traders net-short is 2.9% higher than yesterday and 9.3% higher from last week.
  • Retail trader data shows 60.2% of traders are net-long USD/JPY with the ratio of traders long to short at 1.51 to 1. The number of traders net-long is 1.4% higher than yesterday and 29.7% higher from last week, while the number of traders net-short is 18.7% higher than yesterday and 16.9% lower from last week.
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--- Written by David Song, Currency Analyst

To contact David, e-mail Follow me on Twitter at @DavidJSong.

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