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EUR/USD Approaches Channel Resistance Even as ECB Boosts Pace of PEPP

EUR/USD Approaches Channel Resistance Even as ECB Boosts Pace of PEPP

David Song, Strategist

EUR/USD Rate Talking Points

EUR/USD trades to a fresh monthly high (1.1993) even though the European Central Bank (ECB) boosts the pace of the pandemic emergency purchase programme (PEPP), and the exchange rate may continue to appreciate over the coming days if it manages to break out of the descending channel from earlier this year.

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EUR/USD Approaches Channel Resistance Even as ECB Boosts Pace of PEPP

EUR/USD appears to have reversed course ahead of the November low (1.1603) as it trades above the 50-Day SMA (1.1962) for the first time since February, and the recent series of higher highs and lows in the exchange rate may lead to a test of the March high (1.2113) as the Relative Strength Index (RSI) breaks out of the downward trend carried over from the end of 2020.

It remains to be seen if the bullish price sequence will push EUR/USD out of the descending channel as “the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year,” with the updated consolidated financial statement showing a EUR 21.3 billion expansion in the week ending April 9 following a EUR 15.6 billion rise the week prior.

Image of ECB balance sheet

Source: ECB

A further pickup in the pace of the PEPP may produce headwinds for the Euro as the ECB relies on its non-standard tools to achieve its one and only mandate for price stability, and President Christine Lagarde and Co. may retain the current course at the next meeting on April 22 as the Governing Council pledges to “review the purchase pace on a quarterly basis at its monetary policy meetings, based on joint assessments of financing conditions and the inflation outlook.”

Until then, the recent recovery in EUR/USD may gather pace as it trades above the 50-Day SMA (1.1962) for the first time since February, and the exchange rate may continue to retrace the decline from earlier this year as the crowding behavior from 2020 resurfaces.

Image of IG Client Sentiment for EUR/USD rate

The IG Client Sentiment report shows only 34.74% of traders are currently net-long EUR/USD, with the ratio of traders short to long standing at 1.88 to 1.

The number of traders net-long is 3.10% lower than yesterday and 14.95% lower from last week, while the number of traders net-short is 10.44% higher than yesterday and 13.59% higher from last week. The decline in net-long position could be a function of profit taking behavior as EUR/USD trades to a fresh monthly high (1.1993), while the rise in net-short interest has fueled the tilt in retail sentiment as 41.28% of traders were net-long the pair during the previous week.

With that said, the decline from the January high (1.2350) may turn out to be a correction rather than a shift in the broader trend as the crowding behavior from 2020 returns, and the recent series of higher highs and lows in the exchange rate may lead to a test of the March high (1.2113) if it manages to break out of the descending channel from earlier this year.

EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • EUR/USD established a descending channel following the failed attempt to test the April 2018 high (1.2414), and the decline from the January high (1.2350) may turn out to be change in trend as the 50-Day SMA (1.1962) reflects a negative slope.
  • In turn, EUR/USD may trade within the March range as the exchange rate approaches channel resistance, but recent developments in the Relative Strength Index (RSI) indicate a further appreciation in the exchange rate as the oscillator breaks out of the downward trend from earlier this year.
  • EUR/USD has come up against the Fibonacci overlap around 1.1960 (61.8% expansion) to 1.1970 (23.6% expansion) as it trades above the 50-Day SMA (1.1962) for the first time since February, with a break/close above the 1.2010 (100% expansion) region bringing the 1.2080 (78.6% retracement) area on the radar as the exchange rate breaks out of the descending channel.

--- 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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