EUR/USD Rate Talking Points
EUR/USD attempts to retrace the decline from the start of the week even though the European Central Bank (ECB) warns of a protracted recovery, and key market trends may influence the exchange rate throughout the remainder of the year as the US Dollar continues to broadly reflect an inverse relationship with investor confidence.
EUR/USD to Face Range Bound Prices Amid Failure to Test Monthly High
EUR/USD appears to be stuck in a narrow range after failing to test the monthly high (1.1920) during the previous week, and the exchange rate may consolidate ahead of Thanksgiving as market participation is likely to thin ahead of the major US holiday.
However, the Euro may face headwinds ahead of 2021 as ECB Chief Economist Philip Lane warns that the “the situation will not materially improve in the last weeks of 2020,” with the Governing Council official going onto say that “the full recovery of GDP, back to where it was in 2019, will not happen before the autumn of 2022” during an interview with Les Echos.
Lane also warns against putting “too much importance to short delays in finalising the Next Generation EU (NGEU) plan” as the fiscal package should be geared towards providing “a vision for the next five years,” and it remains to be seen if the ECB will take additional steps to support the Euro Area as the Governing Council plans to “recalibrate our monetary policy instruments at our meeting in December.”
In turn, board member Lane insists that “there is room for further cuts in the future” as the ECB’s main refinance rate, the benchmark for borrowing costs, currently sits at zero, but the central bank appears to be in no rush to deploy more non-standard measures as the “pandemic emergency purchase programme (PEPP) and the targeted longer-term refinancing operations (TLTROs) have been very effective.”
As a result, Lanes states that the ECB could “look at a possible redesign, continuation or extension” of its unconventional measures, and it seems as though President Christine Lagarde and Co. will stick to its current tools at its next interest rate decision on December 10 as the European lawmakers look to rollout the recovery fund in 2021.
Until then, swings in risk appetite may sway EUR/USD as the US Dollar broadly reflects an inverse relationship with investor confidence, and it looks as though the key market trends will carry into the end of 2020 as the crowding behavior from earlier this year resurfaces.
The IG Client Sentiment report shows only 27.37% of traders are net-long EUR/USD, with the ratio of traders short to long standing at 2.65 to 1. The number of traders net-long is 7.58% lower than yesterday and 26.54% lower from last week, while the number of traders net-short is 2.03% lower than yesterday and 3.19% higher from last week.
The decline in net-long position comes as EUR/USD appears to be stuck in a narrow range after failing to test the monthly high (1.1920), while the rise in net-short interest has fueled a greater tilt in retail sentiment as 34.61% of traders were net-long the pair during the previous week.
With that said, the consolidation 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 resurfaces, but the exchange rate may trade within a defined range ahead of the Thanksgiving holiday amid the string of failed attempts to test the monthly high (1.1920).
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 (1.1774) crossed above the 200-Day SMA (1.1387), 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 string of failed attempts to close below the 1.1600 (61.8% expansion) to 1.1640 (23.6% expansion) region, with the RSI highlighting a similar dynamic as it breaks of the downward trend carried over from the end of July and recovers from its lowest readings since March.
- The move back above the Fibonacci overlap around 1.1810 (61.8% retracement) to 1.1850 (100% expansion) keeps the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region on the radar, but EUR/USD may trade within a defined range ahead of December amid the lack of momentum to test the monthly high (1.1920).
- Waiting for a break/close above the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region to open up the 1.2080 (78.6% retracement) to 1.2140 (50% retracement) area.
--- Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong
