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EUR Edges Lower But Bulls May Return Soon

EUR Edges Lower But Bulls May Return Soon

Nick Cawley, Strategist

Talking Points

- The Euro is too weak according to Germany but will the ECB listen while inflation remains subdued?

- EURUSD consolidating before moving higher again?

- See the DailyFX Economic Calendar and see what live coverage for key event risk impacting FX markets is scheduled for next week on the DailyFX Webinar Calendar.

After countless calls from the German Finance Minister for the ECB to tighten monetary policy and boost the value of the Euro, German Chancellor Angela Merkel stepped into the fray recently, expressing concern that the single currency is ‘too weak’. Merkel said that the current ECB monetary policy is making German products cheap in relative terms – boosting the country’s trade surplus to record levels – while the flow of ultra-cheap money is also boosting inflation in Germany to uncomfortably high levels.

Recent data also point to a robust German economy, with Tuesday’s Ifo business climate index hitting the highest levels since reunification in 1990, while German private-sector output grew at the fastest pace in over six years, according to ‘flash’ PMI data.

And it is the sharp rise in inflation over the last year that is causing Germany to push for tighter monetary policy, especially when domestic savers receive little or no interest on their savings, due to the negative yields on a substantial range of German government debt.

EUR Edges Lower But Bulls May Return Soon

However, the latest commentary from ECB Vice President Vitor Constancio pushed back against the latest German commentary. Constancio said that the central bank must be cautious about premature withdrawal of stimulus, adding that it was better to err on the side of caution and withdraw stimulus too late rather than too early.

And speaking at a conference in Sofia, ECB chief economist Peter Praet said the central bank needed to see a more sustained pick-up in inflation before amending monetary policy. Praet highlighted that underlying inflation pressures “still give scant indications of a convincing upward trend as domestic cost pressures, notably wage growth, remain subdued.”

The single currency has been boosted by the recent German rhetoric and data, and has pushed to multi-month highs. Against an already weak US Dollar, the EUR pushed back to levels last seen in November 2016, before giving back a touch of the rally. On the technical front, the pair now trades above the 100-day moving average, a bullish chart set-up opening the pair to further upside towards the May 2016 high of 1.1616.

Chart: EURUSD Weekly Timeframe (July 2015 – May 24, 2017)

EUR Edges Lower But Bulls May Return Soon

Chart by IG

And the latest IG Client Sentiment Data, show retail investors remain short of the single currency, pointing to a neutral current outlook but with further upside possible.

EUR Edges Lower But Bulls May Return Soon

Retail trader data shows 26.9% of traders are net-long with the ratio of traders short to long at 2.72 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.06101; price has moved 5.5% higher since then. The number of traders net-long is 7.5% higher than yesterday and 6.9% higher from last week, while the number of traders net-short is 2.3% higher than yesterday and 9.4% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.

--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

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