Talking Points
- A strengthening and broadening recovery but inflation may still take time to settle in, according to the ECB chief.
- Retail sentiment shows a contrarian bullish backdrop for the single currency.
ECB President Mario Draghi today said that the euro zone economy was witnessing a ‘strengthening and broadening recovery’, underlying his view that the central bank’s monetary policy is on track to meet its remit. However, he also stressed that while deflationary forces have receded, inflation is yet to hit levels required to tighten his monetary stance.
“We can be confident that our policy is working and its full effects on inflation will gradually materialize,” Draghi said at the European Central Bank Forum in Portugal. However he added that for the policy to be persistent, “We need to be prudent in how we adjust its parameters to improving economic conditions,” a nod to recent calls to reduce the ongoing quantitative easing program.
Today’s thoughts pushed EURGBP to a fresh near one-week high with further upside on the cards. A look at the daily chart identifies the June 12 high of 0.88665 as the first target which would leave the pair open to a run at the November 9 high of 0.90257.
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Chart: EURGBP Daily Timeframe (October 16, 2016 – June 27, 2017)
The pair have also broken back above the 20-day moving average and have plenty of room to move back up to the 80 level (oversold) on the stochastic indicator.
And if we look at retail positioning in the pair, there is a pool of buyers who will eventually need to cover their short positions. Looking at the IG Client Sentiment indicator, retail investors remain short of EURGBP and have become further net short over the last week. We frequently use this data as a contrarian signal to help forecast currency moves.
Retail trader data shows 31.1% of traders are net-long with the ratio of traders short to long at 2.21 to 1. In fact, traders have remained net-short since May 16 when EURGBP traded near 0.84034; price has moved 5.1% higher since then. The number of traders net-long is 10.7% lower than yesterday and 7.6% lower from last week, while the number of traders net-short is 5.4% higher than yesterday and 1.6% higher from last week.
If you would like to get your free IG Client Sentiment trading guide, please click here.
Looking ahead, the single currency may get another upward leg on Thursday, June 29 as a raft of Euro-Zone Confidence indicators are released.
Please join DailyFX analyst Martin Essex on Thursday for the numbers, market set ups and moves from 08:45 GMT onwards here.
--- Written by Nick Cawley, Analyst
To contact Nick, email him at nicholas.cawley@ig.com
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