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EUR/USD Rate Consolidates with ECB Interest Rate Decision on Tap

EUR/USD Rate Consolidates with ECB Interest Rate Decision on Tap

David Song, Strategist

EUR/USD Rate Talking Points

EUR/USD consolidate after trading to a fresh monthly high (1.1669) during the previous week, but the European Central Bank (ECB) interest rate decision may sway the near-term outlook for the exchange rate if the Governing Council adjusts the forward guidance for monetary policy.

EUR/USD Rate Consolidates with ECB Interest Rate Decision on Tap

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EUR/USD appears to be under pressure as the ECB is expected to retain the current course for monetary policy, and more of the same from the Governing Council may drag on the exchange rate as the central bank relies on its non-standard tools to support the Euro Area.

Image of DailyFX Economic Calendar for Euro Area

Keep in mind, the account of the ECB’s September meeting suggests the central bank is on a preset course as the Governing Council argues that “near-term increase in inflation was largely driven by temporary factors that would fade in the medium term and not call for policy tightening,” and it seems as President Christine Lagarde and Co. will stick to the sidelines as a further reduction in the pace of purchases under the pandemic emergency purchase programme (PEPP)might induce market perceptions of a tighter than expected monetary policy, which could result in a tightening of financing conditions.

As a result, the Euro may face headwinds if the ECB may stick to the same script ahead of its last 2021 interest rate decision in December, but a material adjust in the forward guidance for monetary policy may fuel the recent rebound in EUR/USD as the “Governing Council judged that favourable financing conditions could be maintained with a moderately lower pace of net asset purchases under the PEPP than in the previous two quarters.

In turn, hints of an ECB exit strategy may generate a bullish reaction in the Euro as “members assessed the risks to the economic outlook as broadly balanced,” but a further recovery in EUR/USD may continue to alleviate the tilt in retail sentiment like the behavior seen earlier this year.

Image of IG Client Sentiment for EUR/USD rate

The IG Client Sentiment report shows 57.75% of traders are currently net-long EUR/USD, with the ratio of traders long to short standing at 1.37 to 1.

The number of traders net-long is 0.50% higher than yesterday and 1.04% higher from last week, while the number of traders net-short is 11.47% higher than yesterday and 20.36% higher from last week. The marginal rise in net-long position comes as EUR/USD clears the opening range for October, while the jump in net-short interest has helped to alleviate the tilt in retail sentiment as 61.77% of traders were net-long the pair last week.

With that said, the rebound from the monthly low (1.1525) may turn out to be a correction in the broader trend as EUR/USD trades to fresh yearly lows in the second half of 2021,but the ECB rate decision may sway the near-term outlook for the exchange rate if the Governing Council unexpectedly adjusts the forward guidance for monetary policy.

EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • Keep in mind, EUR/USD sits below the 200-Day SMA (1.1912) 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 moving average establishing a negative slope as the exchange rate traded to a fresh yearly low (1.1525) in October.
  • However, the Relative Strength Index (RSI) appears to have diverged with price as textbook buy signal emerged at the start of the month, and recent developments raise the scope for a larger correction in EUR/USD as the oscillator continues to recover from oversold territory.
  • The failed attempt to test the Fibonacci overlap around 1.1440 (78.6% expansion) to 1.1490 (50% retracement) has pushed EUR/USD back above the 1.1610 (50% expansion) region, with a break/close above the 1.1670 (78.6% expansion) to 1.1710 (61.8% retracement) area opening up the 1.1770 (23.6% expansion) to 1.1810 (61.8% retracement) zone.
  • At the same time, lack of momentum to break/close above the 1.1670 (78.6% expansion) to 1.1710 (61.8% retracement) region may keep EUR/USD within a defined range, but failure to defend the monthly low (1.1525) may generate another test of the overlap around 1.1440 (78.6% expansion) to 1.1490 (50% retracement), with the next area of interest coming in around 1.1390 (61.8% retracement).

--- 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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