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EUR/USD Rate Outlook Hinges on US Fiscal Stimulus, ECB Rate Decision

EUR/USD Rate Outlook Hinges on US Fiscal Stimulus, ECB Rate Decision

2020-10-20 05:00:00
David Song, Strategist
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EUR/USD Rate Talking Points

EUR/USD initiates a series of higher highs and lows even though the European Central Bank (ECB) warns of a protracted recovery, and the exchange rate may stage a larger recovery over the coming days as the Governing Council appears to be on track to retain the current policy at the next meeting on October 29.

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EUR/USD Rate Outlook Hinges on US Fiscal Stimulus, ECB Meeting

EUR/USD preserves the rebound from the monthly low (1.1689) as the US Dollar Index (DXY) trades within the confines of a Descending Channel, and the exchange rate may continue to retrace the decline from the yearly high (1.2011) as the Relative Strength Index (RSI) breaks out of the downward trend carried over from late July.

Looking ahead, fresh developments coming out of the US may sway EUR/USD as lawmakers prepares to vote on another fiscal stimulus package later this week, but the deadlock in Congress may produce headwinds for the Greenback as it puts pressure on the Federal Reserve to deploy more non-standard measures.

However, the US Dollar may continue to show an inverse relationship with investor confidence as the Federal Open Market Committee (FOMC) plans to unveil a “more explicit outcome-based forward guidance,” and key market trends may persist ahead of the next interest rate decision on November 5 as the Fed’s balance sheet increases for the second week to approach the peak from June.

At the same time, the ECB appears to be in no rush to alter the path for monetary policy even though President Christine Lagarde warns that the Euro Area recovery “now risks losing momentum” as the central bank head points out that “if the situation deteriorates, our projections, which we will revise in December, will obviously be gloomier.

The comments suggests the ECB will retain a wait-and-see approach ahead of its last meeting for 2020 as the account of the September meeting reveals that the “PEPP (Pandemic Emergency Purchase Programme) envelope would likely have to be used in full to provide the necessary accommodation to offset the downward impact of the pandemic on the path of inflation, and the Governing Council may stick to the same script on October 29 as President Lagarde insists that “the options in our toolbox have not been exhausted.”

In turn, key market trends may carry into the month ahead as the tilt in retail sentiment persists, with traders net-short EUR/USD since mid-May.

Image of IG Client Sentiment for EUR/USD rate

The IG Client Sentiment report shows only 32.89% of traders are net-long with the ratio of traders short to long at 2.04 to 1. The number of traders net-long is 12.19% lower than yesterday and 11.53% lower from last week, while the number of traders net-short is 16.61% higher than yesterday and 3.86% higher from last week.

The decline in net-long position could be a function of profit-taking behavior as EUR/USD bounces back from the monthly low (1.1689), while the rise in net-short interest has spurred a further tilt in retail sentiment as 37.24% of traders were net-long the pair last week.

With that said, the decline from the yearly high (1.2011) may turn out to be an exhaustion in the bullish price action rather than a change in trendas the crowding behavior in EUR/USD remains, and the exchange rate may stage a larger rebound over the coming days as the Relative Strength Index (RSI) breaks out of the downward trend carried over from late July.

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EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • Keep in mind, a ‘golden cross’ materialized in EUR/USD towards the end of June as the 50-Day SMA (1.1794) crossed above the 200-Day SMA (1.1286), with the longer-term moving average still tracking the positive slope from earlier this year.
  • At the same time, a bull flag formation panned out following the failed attempt to close below the 1.1190 (38.2% retracement) to 1.1220 (78.6% expansion) region in July, with the Relative Strength Index (RSI) helping to validate the continuation pattern as the oscillator bounced along trendline support to preserve the upward trend from March.
  • However, the EUR/USD rally stalled following the failed attempt to close above the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region, with the RSI highlighting a similar dynamic as it slipped below 70 to ultimately break trendline support.
  • A similar scenario materialized in September even though EUR/USD traded to a fresh yearly high (1.2011) at the start of the month, with the exchange rate taking out the August low (1.1696) after staging another failed attempt to close above the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region.
  • Nevertheless, the pullback from the yearly high (1.2011) may prove to be an exhaustion in the bullish price action rather than a change in trend amid the lack of momentum to break/close below the 1.1600 (61.8% expansion) to 1.1640 (23.6% expansion) region, with the RSI highlighting a similar dynamic as it reverses ahead of oversold territory and breaks of the downward trend carried over from the end of July.
  • The rebound from the monthly low (1.1689) may gather pace as EUR/USD initiates a series of higher highs and lows, but need a break/close above the Fibonacci overlap around 1.1810 (61.8% retracement) to 1.1850 (100% expansion) to bring the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region on the radar.
  • The 2020 high (1.2011) comes up next followed by the 1.2080 (78.6% retracement) to 1.2140 (50% retracement) area.
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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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

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