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EUR/USD Rate on Cusp of Testing 200-Day SMA Ahead of ECB Rate Decision

EUR/USD Rate on Cusp of Testing 200-Day SMA Ahead of ECB Rate Decision

David Song, Strategist

EUR/USD Rate Talking Points

EUR/USD trades to a fresh yearly low (1.1857) as longer-dated US Treasury yields continue to push above pre-pandemic levels, and the Relative Strength Index (RSI) may show the bearish momentum gathering pace as it flirts with oversold territory for the first since February 2020.

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EUR/USD Rateon Cusp of Testing 200-Day SMA Ahead of ECB Rate Decision

EUR/USD extends the series lower highs and lows from the previous week amid the failed attempt to defend the January low (1.1952), and the Euro may continue to weaken against the Greenback ahead of the European Central Bank (ECB) meeting on March 11 as the US Dollar still broadly reflects an inverse relationship with investor confidence.

Image of DailyFX economic calendar for Euro

It remains to be seen if the ECB interest rate decision will influence the near-term outlook for EUR/USD as the central bank is expected to retain the current path for monetary policy, and more of the same from the Governing Council may lead to a limited market reaction as board member Fabio Panetta warns that “the risks of providing too little policy support still far outweigh the risks of providing too much.”

It seems as though the ECB is on a preset course after expanding and extending the pandemic emergency purchase programme (PPEP) at its last meeting for 2020, and President Christine Lagarde and Co. may largely endorse a wait-and-see approach over the coming months as European authorities prepare to distribute the Next Generation EU (NGEU) programme in 202.

In turn, the decline from the from the January high (1.2350) may turn out to be a correction in the broader trend rather than a change in EUR/USD behavior like the pullback from the September high (1.2011), but the recent selloff in the Euro has triggered a flip in retail sentiment as the exchange rate is on cusp of test the 200-Day SMA (1.1813) for the first time since May 2020.

Image of IG Client Sentiment for EUR/USD rate

The IG Client Sentiment report shows 52.11% of traders are currently net-long EUR/USD, with the ratio of traders long to short standing at 1.09 to 1.

The number of traders net-long is 10.35% higher than yesterday and 8.60% higher from last week, while the number of traders net-short is 21.19% higher than yesterday and 0.15% lower from last week. The rise in net-long interest has led to a shift in retail sentiment as 49.71% of traders were net-long EUR/USD last week, while the marginal decline in net-short position comes amid the failed attempt to defend the January low (1.1952).

In turn,a further decline in EUR/USD may spur a larger shift in retail sentiment as the exchange rate takes out the December low (1.1923), and looming developments in the Relative Strength Index (RSI) may show the bearish momentum gathering pace if the oscillator slips below 30 and pushes into oversold territory for the first time since February 2020.

With that said, EUR/USD appears to be on track to test the 200-Day SMA (1.1813) as it extends the series of lower highs and lows from the previous week, and it remains to be seen if the decline from the January high (1.2350) will turn out to be a correction in the broader trend or a material change in EUR/USD behavior as major central banks still rely on their emergency tools to achieve their policy targets.

EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • Keep in mind, the EUR/USDcorrection from the September high (1.2011) proved to be an exhaustion in the bullish price action rather than a change in trend following the string of failed attempts to close below the 1.1600 (61.8% expansion) to 1.1640 (23.6% expansion) region, with the Relative Strength Index (RSI) reflecting a similar dynamic as the oscillator broke out of the downward trend to recover from its lowest readings since March.
  • However, EUR/USD appears to have reversed course following the failed attempt to test the April 2018 high (1.2414), with the exchange rate extending the decline from the January high (1.2350) as it struggled to push back above the 50-Day SMA (1.2122) despite the flattening slope in the moving average.
  • The 50-Day SMA (1.2122) appears to be developing a negative slope as EUR/USD fails to defend the January low (1.1952), and looming developments in the RSI may show the bearish momentum gathering pace if the oscillator slips below 30 and pushes into oversold territory for the first time since February 2020.
  • A break/close below 1.1860 (61.8% expansion) brings the 1.1810 (61.8% retracement) area on the radar, which lines up with the 200-Day SMA (1.1813), with the next region of interest coming in around 1.1760 (38.2% expansion) followed by the Fibonacci overlap around 1.1660 (38.2% expansion) to 1.1710 (61.8% retracement).

--- 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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