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EUR/USD Rally Stalls Ahead of February High Even as ECB Slows PEPP

EUR/USD Rally Stalls Ahead of February High Even as ECB Slows PEPP

David Song, Strategist

EUR/USD Rate Talking Points

EUR/USD pulls back from a fresh monthly high (1.2182) even as the European Central Bank (ECB) slows the pace of the pandemic emergency purchase programme (PEPP), and the exchange rate may consolidate over the remainder of the week as itsnaps the series of higher highs and lows from the previous week.

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EUR/USD Rally Stalls Ahead of February High Even as ECB Slows PEPP

The recent rally in EUR/USD appears to have stalled ahead of the February high (1.2243) as it gives back the advance following the US Non-Farm Payrolls (NFP) report, and data prints coming out of the world’s largest economy may continue to sway the exchange rate as it slips to a fresh weekly low (1.2072) following the update to the Consumer Price Index (CPI).

Image of DailyFX economic calendar for US

It remains to be seen if the US Retail Sales report will sway EUR/USD as the sharp price in both the headline and core CPI triggers a rise in longer-dated Treasury yields, but a slowdown in household consumption may trigger a bearish reaction in the US Dollar as it encourages the Federal Reserve to retain the current course for monetary policy.

Meanwhile, the account of the European Central Bank (ECB) meeting may go unnoticed as the Governing Council “expects purchases under the PEPP over the current quarter to continue to be conducted at a significantly higher pace than during the first months of the year,” and more of the same from President Christine Lagarde and Co. may do little to influence the near-term outlook for EUR/USD as the central bank appears to be in no rush to scale back its emergency measures.

Image of ECB balance sheet

Source: ECB

However, recent figures coming out of the ECB showed the PEPP increasing EUR 24.6 billion in the week May 7 after expanding EUR 26.5 billion the week prior, and a further slowdown in the pace of asset purchases may keep EUR/USD afloat especially as the crowding behavior from 2020 resurfaces.

Image of IG Client Sentiment for EUR/USD

The IG Client Sentiment report shows only 34.89% of traders are currently net-long EUR/USD, with the ratio of traders short to long standing at 1.87 to 1.

The number of traders net-long is 3.23% higher than yesterday and 14.22% lower from last week, while the number of traders net-short is 0.69% lower than yesterday and 1.49% higher from last week. The decline in net-long position has generated a further tilt in retail sentiment as 37.41% of traders were net-long EUR/USD at the end of April, while the marginal rise in net-short position comes as the recent rally in the exchange rate appears to have stalled ahead of the February high (1.2243).

With that said, the broader outlook for EUR/USD remains constructive as it breaks out of the descending channel from earlier this year, but the exchange rate may consolidate over the remainder of the week as it snaps the series of higher highs and lows from the previous week.

EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • Keep in mind, EUR/USD established a descending channel following the failed attempt to test the April 2018 high (1.2414), but the decline from the January high (1.2350) may turn out to be a correction in the broader trend rather than a change in market behavior as the exchange rate trades back above the 50-Day SMA (1.1950) to break out of the bearish trend.
  • The Relative Strength Index (RSI) showed a similar dynamic as the oscillator reversed ahead of oversold territory to break out of a downward trend, but the string of failed attempts to push above 70 warns of a pullback in EUR/USD as it appears to be reversing course ahead of the February high (1.2243).
  • Lack of momentum to close above the Fibonacci overlap around 1.2140 (50% retracement) to 1.2170 (78.6% expansion) may push EUR/USD back below the 1.2080 (78.6% retracement) region, with the next area of interest coming in around 1.2010 (100% expansion).
  • Need a closing price above the Fibonacci overlap around 1.2140 (50% retracement) to 1.2170 (78.6% expansion) to bring the 1.2220 (38.2% expansion) to 1.2260 (161.8% expansion) region on the radar, which largely lines up with the February high (1.2243).

--- 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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