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EUR/USD Fails to Test March High as ECB Boosts PEPP for Second Week

EUR/USD Fails to Test March High as ECB Boosts PEPP for Second Week

David Song, Strategist

EUR/USD Rate Talking Points

EUR/USD pulls back from a fresh monthly high (1.2080) as the European Central Bank (ECB) boosts the pace of the pandemic emergency purchase programme (PEPP) for the second consecutive week, and the April interest rate decision may keep the exchange rate under pressure if the Governing Council shows a greater willingness to further support the monetary union.

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EUR/USD Fails to Test March High as ECB Boosts PEPP for Second Week

The recent rebound in EUR/USD appears to have stalled as it fails to test the March high (1.2113), and the exchange rate may trade back within the descending channel from earlier this year as the ECB “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.”

Image of DailyFX economic calendar for Euro Area

It seems as though the ECB is on a preset course as the central bank plans to “review the purchase pace on a quarterly basis at its monetary policy meetings,” and more of the same from the Governing Council may produce headwinds for the Euro as updated consolidated financial statement shows the PEPP expanding EUR 28.4 billion in the week ending April 16 after rising EUR 21.3 billion the week prior.

Image of ECB balance sheet

In turn, the ECB may keep the door open to further support the monetary union as Christine Lagarde and Co. “stand ready to adjust all of our instruments, as appropriate, to ensure that inflation moves towards our aim in a sustained manner,” but EUR/USD may make further attempts to break out of the downward trending channel 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 34.43% of traders are currently net-long EUR/USD, with the ratio of traders short to long standing at 1.90 to 1.

The number of traders net-long is 1.25% lower than yesterday and 8.94% lower from last week, while the number of traders net-short is 2.74% higher than yesterday and 5.20% higher from last week. The decline in net-long position comes as EUR/USD pulls back from a fresh monthly high (1.2080), while the rise in net-short interest has upheld the renewed tilt in retail sentiment as 34.74% of traders were net-long the pair during the previous week.

With that said, it remains to be seen the failed attempt to test the March high (1.2113) will keep EUR/USD within the descending channel from earlier this year as the crowding behavior from 2020 resurfaces, but the ECB rate decision may drag on the exchange rate as the central bank plans to boost the pace of the PEPP in the second quarter of 2021.

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 (1.1957) reflects a negative slope.
  • EUR/USD came up against channel resistance as the Relative Strength Index (RSI) broke out of the downward trend from earlier this year, but the failed attempt to test the March high (1.2113) may push EUR/USD back within the bearish formation as it struggles to hold above the 1.2010 (100% expansion) region,
  • In turn, the Fibonacci overlap around 1.1960 (61.8% expansion) to 1.1970 (23.6% expansion) is back on the radar as the exchange rate initiates a series of lower highs and lows, with the next area of interest coming in around 1.1860 (61.8% expansion) followed by the 1.1810 (61.8% retracement) region.

--- 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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