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EURUSD May Dip Before Climb Resumes

EURUSD May Dip Before Climb Resumes

Martin Essex, MSTA, Analyst

Talking Points:

- Fundamental, technical and political factors all suggest that EURUSD may slip back near-term.

- Longer-term, further strength is likely.

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EURUSD set to slip back

EURUSD climbed steadily throughout 2017 and that advance has continued into the early days of 2018, with the pair reaching a three-year high. However, it may be due for a correction lower before its advance resumes.

For now, the focus is on the monetary-policy meeting of the European Central Bank’s Governing Council on January 25 and the subsequent press conference where, according to the Reuters newsagency,the ECB is unlikely to ditch its pledge to keep buying bonds as its rate setters need more time to assess the outlook for the economy and the Euro.

While stories quoting “sources” need to be treated cautiously, this suggests a weaker currency, with any changes in the ECB’s market guidance likely to come later, perhaps in March, although ECB President Mario Draghi could still drop a hint next week that the pledge may be dropped.

EURUSD Price Chart Daily Timeframe (January 2, 2017 to January 17, 2018)

EURUSD May Dip Before Climb Resumes

Chart by IG

Political concerns to weigh on Euro

In addition, concerns persist that German Chancellor Angela Merkel has not yet succeeded in putting together a “grand coalition” of her conservative CDU/CSU grouping and the country’s center-left SPD. The SPD is due to decide on Sunday whether to proceed with coalition talks and, if it decides against, then speculation will re-emerge of a minority government or fresh elections – both potentially negative for the Euro.

Concerns are also likely to reemerge about the situation in Catalonia, where the regional government meets today to form a government and moves towards a split from Spain remain a possibility.

EURUSD technically weak

From a technical perspective, the relative strength index is now in “overbought” territory, with the 14-day RSI above 70, raising the possibility of a fall back to the 20-day moving average – currently at 1.2038 – and then to the January 9/10 lows close to 1.1916.

Market positioning, though, urges caution. IG Client Sentiment data show 32.4% of traders net-long EURUSD, with the ratio of traders short to long at 2.09 to 1. The number of traders net-long is 5.9% lower than yesterday and 8.1% lower from last week, while the number of traders net-short is 6.8% higher than yesterday and 5.8% lower 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. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives a stronger EURUSD-bullish contrarian trading bias.

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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