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EUR/USD Rate Defends Monthly Low Ahead of Account of ECB Meeting

EUR/USD Rate Defends Monthly Low Ahead of Account of ECB Meeting

David Song, Strategist

EUR/USD Rate Talking Points

EUR/USD attempts to retrace the decline from the start of the week as it snaps the recent series of lower highs and lows, and the exchange rate may stage a larger rebound over the coming days as it appears to be reversing course ahead of the monthly low (1.1272).

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EUR/USD Rate Defends Monthly Low Ahead of Account of ECB Meeting

EUR/USD halts a three-day selloff as it bounces back from the 50-Day SMA (1.1321), and it remains to be seen if the account of the European Central Bank’s (ECB) December meeting will influence the exchange rate as the Governing Council plans to “discontinue net asset purchases under the PEPP (Pandemic Emergency Purchase Programme) at the end of March 2022.

Image of DailyFX Economic Calendar for Euro Area

The transcript may generate a bullish reaction in the Euro as the ECB insists that “the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance,” and indications of a more detailed exit strategy may keep EUR/USD within the monthly range as market participants brace for a change in regime.

However, the ECB may keep the door open to further support the Euro Area as President Christine Lagarde and Co. emphasize that “net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic,” and more of the same from the Governing Council may drag on EUR/USD as the central bank appears to be in no rush to normalize monetary policy.

In turn, the deviating paths between the ECB and Federal Reserve may produce headwinds for EUR/USD as Chairman Jerome Powell and Co. look to implement higher interest rates in 2022, and a further decline in the exchange rate may fuel the recent flip in retail sentiment like the behavior seen during the previous year.

Image of IG Client Sentiment for EUR/USD rate

The IG Client Sentient report shows 63.52% of traders are currently net-long EUR/USD, with the ratio of traders long to short standing at 1.74 to 1.

The number of traders net-long is 6.52% higher than yesterday and 19.75% higher from last week, while the number of traders net-short is 9.24% lower than yesterday and 24.35% lower from last week. The jump in net-long interest has brought back the crowding behavior seen in 2021 as 64.05% of traders were net-long EUR/USD in mid-December, while the surge in net-short position comes as the exchange rate snaps the recent series of lower highs and lows.

With that said, EUR/USD may stage a larger rebound over the coming days as it appears to be reversing course ahead of the monthly low (1.1272), but the account of the ECB meeting may do little to prop up the exchange rate as the “the Governing Council stands ready to adjust all of its instruments, as appropriate and in either direction, to ensure that inflation stabilises at its 2% target over the medium term.

EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • Keep in mind, EUR/USD traded to fresh yearly lows in the second half of 2021 as the advance from the March low (1.1704) failed to produce a test of the January high (1.2350), and the bearish trend looks poised to persist as both the 50-Day SMA (1.1321) and 200-Day SMA (1.1722) reflect a negative slope.
  • However, a near-term correction has emerged following the failed attempt to clear the July 2020 low (1.1185), with EUR/USD pushing above the 50-Day SMA (1.1321) for the first time since September as it broke above the December high (1.1386).
  • Nevertheless, lack of momentum to break/close above the Fibonacci overlap around 1.1490 (50% retracement) to 1.1540 (61.8% expansion) has pushed EUR/USD back towards the 1.1290 (61.8% retracement) to 1.1310 (100% expansion) region, with a break of the monthly low (1.1272) opening up the 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement) area.
  • At the same time, EUR/USD may continue to track the monthly range if it continues to defend the January low (1.1272), with a move above the 1.1440 (78.6% expansion) to 1.1450 (50% retracement) region bringing the Fibonacci overlap around 1.1490 (50% retracement) to 1.1540 (61.8% expansion) back on the radar.

--- 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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