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Cautious ECB Minutes to Derail EUR/USD Continuation Pattern

Cautious ECB Minutes to Derail EUR/USD Continuation Pattern

David Song,

Talking Points:

- EUR/USD Holds Monthly Range- Cautious ECB Minutes to Derail Continuation Pattern.

- USD/JPY to Stage Larger Rebound on Upbeat U.S. Retail Sales Report.

- Sign Up for the DailyFX Trading Webinars for an opportunity to discuss potential trade setups.

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

EUR/USD struggles to retain the advance from the previous week, with the pair at risk of facing range-bound conditions ahead of the European Central Bank (ECB) meeting minutes as it fails to fill the gap from January-2015 (1.2000 down to 1.1955).

ECB officials may pay increased attention to the ongoing appreciation in the euro-dollar exchange rate as it undermines the central bank’s scope to achieve the 2% target for price growth, and the Governing Council may keep the door open to further support the monetary union as ‘measures of underlying inflation remain overall at subdued levels.’ In turn, President Mario Draghi and Co. merely attempt to buy more time at the next policy meeting on September 7 as ‘underlying inflation in the euro area is expected to rise only gradually over the medium term, supported by our monetary policy measures.’

However, positive developments coming out of the euro-area may encourage a growing number of Governing Council officials to adopt a hawkish tone, and the central bank may come under increased pressure to taper the quantitative easing (QE) program ahead of the December deadline as ‘the risks to the growth outlook are broadly balanced.’

EUR/USD Daily Chart

EUR/USD Daily Chart

Chart - Created Using Trading View

  • Broader outlook for EUR/USD remains constructive as both price & the Relative Strength Index (RSI) retain the upward trends from earlier this year, with the pair at risk of extending the rebound from the monthly-low (1.1689) as a continuation pattern appears to be taking shape.
  • However, the lack of momentum to close the gap from January-2015 (1.2000 down to 1.1955) may keep the pair within the monthly opening range, and the euro-dollar exchange rate may face a larger correction if the 1.1670 (50% retracement) region fails to offer support.
  • Next downside hurdle comes in around 1.1580 (100% expansion) followed by the Fibonacci overlap around 1.1480 (78/6% expansion to 1.1500 (78.6% expansion).
TickerLastHighLowDaily Change (pip)Daily Range (pip)

USD/JPY snaps the bearish sequence from earlier this month, with the pair at risk for a larger recovery as U.S. Retail Sales are expected to pick up 0.4% in July.

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The recent uptick in household earnings accompanied by signs of stronger consumption may keep the Federal Open Market Committee (FOMC) on course to further normalize monetary policy in 2017 as the central bank ‘expects to begin implementing its balance sheet normalization program relatively soon.’ In turn, the fresh rhetoric coming out of the Fed may alter the near-term outlook for USD/JPY should the FOMC Minutes show a greater willingness to unwind the quantitative easing (QE) program at the next interest rate decision on September 20.

However, dollar-yen may face a more bearish fate should the key data prints coming out of the U.S. economy continue to disappoint, and Chair Janet Yellen and Co. may endorse a less-hawkish outlook at the Kansas City Fed Economy Symposium in Jackson Hole, Wyoming as ‘overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent.’

USD/JPY Daily Chart

USD/JPY Daily Chart

Chart - Created Using Trading View

  • Keep in mind USD/JPY has managed to clear the June-low (108.80) and continues to operate within the downward trending channel carried over from July, with the Relative Strength Index (RSI) exhibiting a similar behavior.
  • However, the Fibonacci overlap around 108.30 (61.8% retracement) to 108.40 (100% expansion) may continue to offer support especially as USD/JPY snaps the series of lower highs & lows from the previous week.
  • Keeping a close eye on the RSI as it fails to push below 30 and appears to be turning around ahead of oversold territory; may see USD/JPY stage a larger recovery if both price & the momentum indicator break out of the bearish formations.
  • Need a close above the 109.90 (78.6% expansion) hurdle to open up the region of interest around 111.10 (61.8% expansion) to 111.60 (38.2% retracement) followed by the overlap around 112.40 (61.8% retracement) to 112.80 (38.2% retracement).

Retail Sentiment

Retail Sentiment

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

  • Retail trader data shows 31.3% of traders are net-long EUR/USD with the ratio of traders short to long at 2.19 to 1. In fact, traders have remained net-short since April 18 when EUR/USD traded near 1.06841; price has moved 10.3% higher since then. The number of traders net-long is 11.0% higher than yesterday and 2.5% lower from last week, while the number of traders net-short is 4.9% higher than yesterday and 14.4% lower from last week.
  • Retail trader data shows 72.2% of traders are net-long USD/JPY with the ratio of traders long to short at 2.59 to 1. In fact, traders have remained net-long since July 18 when USDJPY traded near 112.524; price has moved 2.7% lower since then. The number of traders net-long is 2.7% higher than yesterday and 2.6% lower from last week, while the number of traders net-short is 22.2% higher than yesterday and 12.7% higher 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.