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EUR/USD Rate Reverses Ahead of 200-Day SMA with ECB Meeting on Tap

EUR/USD Rate Reverses Ahead of 200-Day SMA with ECB Meeting on Tap

David Song, Strategist

EUR/USD Rate Talking Points

EUR/USD appears to be reversing course ahead of the 200-Day SMA (1.1821) as it attempts to retrace the decline from earlier this week, and it remains to be seen if the European Central Bank (ECB) interest rate decision will influence the near-term outlook for the exchange rate as the Governing Council is expected to retain the current course for monetary policy.

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EUR/USD Rate Reserves Ahead of 200-Day SMA with ECB Meeting on Tap

EUR/USD struggles to extend the series of lower highs and lows carried over from the previous week, with the recent weakness in the US Dollar largely associated with a rise in global equity prices, and more of the same from the ECB may keep key market themes in place as major central banks rely on their emergency tools to achieve their policy targets.

Image of DailyFX economic calendar for Euro Area

The fresh forecasts from the Organisation for Economic Co-operation and Development (OECD) may keep the ECB on the sidelines as the group insists that “the current very accommodative monetary policy stance should be maintained,” and the Governing Council may merely attempt to buy time at its meeting on March 11 as“the risks surrounding the euro area growth outlook remain tilted to the downside but less pronounced.”

It seems as though the ECB is on a preset course after expanding/extending the pandemic emergency purchase programme (PPEP) at its last meeting for 2020 asthe central bank pledges to “purchase flexibly according to market conditions,” and President Christine Lagarde and Co. may endorse a wait-and-see approach over the coming months as European authorities prepare to distribute the Next Generation EU (NGEU) programme in 2021.

In turn, swings in risk appetite may continue to sway EUR/USD as the US Dollar continues to reflect an inverse relationship with investor confidence, but the recent selloff in the exchange rate has triggered a shift in retail sentiment as traders flip net-long for the third time in 2021.

Image of IG Client Sentiment for EUR/USD rate

The IG Client Sentiment report shows 53.21% of traders are currently net-long EUR/USD, with the ratio of traders long to short standing at 1.14 to 1.

The number of traders net-long is 4.77% higher than yesterday and 26.74% higher from last week, while the number of traders net-short is 9.02% higher than yesterday and 4.96% lower from last week. The rise in net-long position comes as EUR/USD attempts to retrace the decline from earlier this week, while the decline in net-short interest has led to a further shift in the IG Client Sentiment index as 52.11% of traders were net-long the pair earlier this week.

With that said, a further decline in EUR/USD may fuel the recent flip in retail sentiment as it slips to a fresh yearly low (1.1836) in March, but the decline from the January high (1.2350) may turn out to be a correction in the broader trend rather than a material change in behavior as the exchange rate appears to reversing course ahead of the 200-Day SMA (1.1821).

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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 (1.2110).
  • The 50-Day SMA (1.2110) appears to be developing a negative slope as EUR/USD trades to a fresh yearlylow (1.1836) in March, but recent developments in the RSI indicate that the bearish momentum may continue to abate in the days ahead as the oscillator quickly bounces back from oversold territory.
  • 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 rather than a change in EUR/USD behavior amid the failed attempt to test the 200-Day SMA (1.1821), but need a move back above 1.1920 (78.6% expansion) to bring the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region on the radar.
  • Next area of interest coming in around 1.2010 (100% expansion) followed by the Fibonacci overlap around 1.2140 (50% retracement) to 1.2170 (78.6% expansion).
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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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