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EUR/USD Price Remains Pointed Lower on Divergent Monetary Policy

EUR/USD Price Remains Pointed Lower on Divergent Monetary Policy

Nick Cawley, Strategist

EUR/USD Price, Chart, and Analysis

  • The Fed is likely to highlight monetary policy differences.
  • Retail building long positions over the week.

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A small trading range for EUR/USD so far today with traders sitting on their hands ahead of the latest FOMC policy decision and press conference. Markets expectations are for further taper talk but with no fixed starting time as yet, giving the Fed the flexibility it needs, while the dot pot may show further Fed members leaning towards either a late-2022 rate hike or for three 0.25% hikes in 2023. The last dot plot suggested two rate hikes only in 2023. While nothing concrete may be released today, the Fed will continue to fan the flames of the taper conversation. The US dollar has been better bid going into this meeting, while US Treasury yields have also inched higher. The daily DXY chart also shows the basket trading in overbought territory ahead of the announcement.

US Dollar Index (DXY) Daily Price Chart September 22, 2021

EUR/USD Price Remains Pointed Lower on Divergent Monetary Policy

While the Fed is fully expected to begin bond tapering by the end of this year, recent commentary from one ECB member suggests that the European Central Bank may keep flushing the system with liquidity. Governing council member Madis Muller today suggested that when the PEPP bond-buying program comes to an end – likely in March 2023 – that the central bank may increase the ongoing APP to keep liquidity conditions loose, dependent on economic conditions at that time. If the ECB increases the APP, the Euro will remain under pressure against the US dollar as the Fed taper program continues.

The daily EUR/USD chart shows continued downward pressure on the pair with the 38.2% Fibonacci level at 1.1704 once again in play. A confirmed break lower will leave the August 20 l0-month low at 1.1662 vulnerable. A mildly dovish Fed announcement tonight may ease the pressure on the pair but any upside is likely limited as the two central banks diverge further.

Euro (EUR/USD) Daily Price Chart September 22, 2021

EUR/USD Price Remains Pointed Lower on Divergent Monetary Policy

Retail trader data show 60.81% of traders are net-long with the ratio of traders long to short at 1.55 to 1. The number of traders net-long is 2.16% lower than yesterday and 20.10% higher from last week, while the number of traders net-short is 8.42% higher than yesterday and 18.77% lower from last week.

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

What is your view on EUR/USD – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.

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