EUR/USD Extends Decline to Test 50-Day SMA Ahead of ECB Rate Decision

EUR/USD Rate Talking Points

EUR/USD tests the 50-Day SMA (1.1802) as it extends the decline from earlier this week, and the European Central Bank (ECB) meeting may do little to shore up the Euro as the Governing Council appears to be on track to retain the current policy.

EUR/USD Extends Decline to Test 50-Day SMA Ahead of ECB Rate Decision

EUR/USD approaches the monthly low (1.1794) as it gives back the reaction to the US Non-Farm Payrolls (NFP) report, and more of the same from the ECB may produce headwinds for the Euro if the Governing Council stays on track conduct the pandemic emergency purchase programme (PEPP) “at a significantly higher pace than during the first months of the year.”

However, recent remarks from President Christine Lagarde suggest the central bank is preparing to alter the forward guidance for monetary policy as the Euro Area “will be back to where we were pre-pandemic at the end of the year,” with the central bank head going onto say that “it’s no longer a question of massive support, it’s going to be a question of focused, targeted support in those sectors that have been badly hurt” while speaking at an event hosted by TIME.

In turn, the ECB rate decision may spark a bullish reaction in EUR/USD if the Governing Council unveils a tentative exit strategy, but a recovery in the exchange rate may fuel the recent flip in retail sentiment like the behavior seen earlier this year.

The IG Client Sentiment report shows 42.07% of traders are currently net-long EUR/USD, with the ratio of traders short to long standing at 1.38 to 1.

The number of traders net-long is 6.01% higher than yesterday and 5.71% lower from last week, while the number of traders net-short is 6.01% lower than yesterday and 7.29% higher from last week. The decline in net-long position comes as EUR/USD extends the decline from earlier this week, while the rise in net-short interest as fueled the recent flip in retail sentiment as 49.17% of traders were net-long the pair last week.

With that said, a material shift in the ECB’s forward guidance may spark a bullish reaction in EUR/USD, but the exchange rate may struggle to retain the opening range for September if President Lagarde and Co. retain the current path for monetary policy.

EUR/USD Rate Daily Chart

Source: Trading View

• Keep in mind, EUR/USD sits below the 200-Day SMA (1.2001) for the first time since April as the advance from the March low (1.1704) failed to produce a test of the January high (1.2350), with the exchange rate trading to a fresh yearly low (1.1664) in August as the 50-Day SMA (1.1802) developed a negative slope.
• As a result, the advance from the August low (1.1664) may turn out to be a correction in the broader trend as EUR/USD failed to defend the range from the first-half of the year, with a break/close below the 1.1780 (23.6% expansion) to 1.1810 (61.8% retracement) region bringing the Fibonacci overlap around 1.1670 (78.6% expansion) to 1.1710 (61.8% retracement) on the radar.
• A break of the August low (1.1664) opens up the 1.1640 (50% expansion) region, with the next area of interest coming around 1.1580 (61.8% expansion).

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong