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EUR/USD Rate Bounces Back From 50-Day SMA Ahead of FOMC Rate Decision

EUR/USD Rate Bounces Back From 50-Day SMA Ahead of FOMC Rate Decision

David Song, Strategist

EUR/USD Rate Talking Points

EUR/USD attempts to retrace the decline following the European Central Bank (ECB) meeting as it bounces back from the 50-Day SMA (1.2104), and the exchange rate may stage a larger recovery over the coming days as the Federal Reserve is expected to retain the current course for monetary policy.

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EUR/USD Rate Bounces Back From 50-Day SMA Ahead of FOMC Rate Decision

The recent weakness in EUR/USD appears to be abating ahead of the Federal Open Market Committee (FOMC) interest rate decision as it initiates a series of higher highs and lows from the monthly low (1.2093), and more of the same from the central bank may prop up the exchange rate as long as the Fed stays on track to “increase its holdings of Treasury securities by at least $80 billion per month and agency mortgage-backed securities by at least $40 billion per month.”

Image of DailyFX economic calendar for US

It seems as though the FOMC is in no rush to switch gears as the central bank plans to utilize its emergency measures “until substantial further progress had been made toward the Committee's maximum-employment and price-stability goals,” and Chairman Jerome Powell and Co. may continue to strike a dovish forward guidance for monetary policy as the central bank remains “committed to using its full range of tools to support the U.S. economy in this challenging time.”

However, another upward revision in the Fed’s Summary of Economic Projections (SEP) may drag on EUR/USD as it fuels speculation for a looming change in monetary policy, and the FOMC may gradually change its tone over the coming months as “a number of participants suggested that if the economy continued to make rapid progress toward the Committee's goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.

Image of Fed interest rate dot plot

Source: FOMC

As a result, market participants are likely to pay increased attention to the Fed’s interest rate dot plot amid the growing discussion within the FOMC to taper the quantitative easing (QE) program, but the tilt in retail sentiment looks poised to persist as traders have been net-short EUR/USD since April.

Image of IG Client Sentiment for EUR/USD rate

The IG Client Sentiment report shows 39.98% of traders are currently net-long EUR/USD, with the ratio of traders short to long standing at 1.50 to 1.

The number of traders net-long is 4.99% lower than yesterday and 0.60% higher from last week, while the number of traders net-short is 6.90% higher than yesterday and 8.69% lower from last week. The small rise in net-long position comes as EUR/USD bounces back from the 50-Day SMA (1.2104), while the decline in net-short interest has helped to alleviate the crowding behavior as only 35.47% of traders were net-long the pair at the end of last week.

With that said, 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 as the crowding behavior from 2020 resurfaces, but the Relative Strength Index (RSI) warns of a further depreciation in the exchange rate as it continues to track the downward trend carried over from late April.

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 (1.2104) 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 suggests the bullish momentum will continue to abate as the indicator reverses ahead of overbought territory and tracks the downward trend from late April.
  • As a result, the decline from the start of the month may gather pace as EUR/USD snaps the opening range for June, with a break/close below the 1.2080 (78.6% retracement) region opening up the 1.2010 (100% expansion) area.
  • However, the rebound off of the 50-Day SMA (1.2104) may push EUR/USD back above the Fibonacci overlap around 1.2140 (50% retracement) to 1.2170 (78.6% expansion) as the moving average reflects a positive slope, with the next area of interest coming in around 1.2220 (38.2% expansion) to 1.2260 (161.8% expansion).

--- 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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