EUR/USD Rate Vulnerable to Another Rise in US PCE

EUR/USD Rate Talking Points

EUR/USD falls back from a fresh monthly high (1.0094) even as the European Central Bank (ECB) implements another 75bp rate hike, and fresh data prints coming out of the US may fuel the recent decline in the exchange rate as the Personal Consumption Expenditure (PCE) Price Index is anticipated to show sticky inflation.

EUR/USD Rate Vulnerable to Another Rise in US PCE

EUR/USD struggles to retain the advance from earlier this week as the ECB emphasizes that the Governing Council has “made substantial progress in withdrawing monetary policy accommodation,” with President Christine Lagarde and Co. showing little interest in pursuing a restrictive policy as “future policy rate decisions will continue to be data-dependent and follow a meeting-by-meeting approach.”

As a result, EUR/USD may face headwinds over the remainder of the year as the Federal Reserve plans to carry its hiking-cycle into 2023, and the update to the US PCE report may encourage the central bank to retain its existing approach in combating inflation as the core reading, the Fed’s preferred gauge for inflation, is expected to increase to 5.2% in September from 4.9% per annum the month prior.

Another uptick in the core PCE may force the Federal Open Market Committee (FOMC) to implement another 75bp rate hike, and EUR/USD may struggle to hold its ground ahead of the Fed interest rate decision on November 2 as the near-term recovery in the exchange rate seems to be stalling ahead of the September high (1.0198).

In turn, failure to extend the recent series of higher highs and lows may keep EUR/USD within the September range, while the recent flip in retail sentiment appears to have been short-lived as traders have been net-long the pair for most of 2022.

The IG Client Sentiment (IGCS) report shows 53.29% of traders are currently net-long EUR/USD, with the ratio of traders long to short standing at 1.14 to 1.

The number of traders net-long is 14.78% higher than yesterday and 8.67% lower from last week, while the number of traders net-short is 12.33% lower than yesterday and 4.20% higher from last week. The decline in net-long position comes as EUR/USD falls back from a fresh monthly high (1.0094), while the rise in net-short interest has done little to curb the flip in retail sentiment as 48.48% of traders were net-long the pair earlier this week.

With that said, the break above the opening range for October may lead to a further recovery in EUR/USD as it extends the series of higher highs and lows from earlier this week, but a rise in the core PCE may keep the exchange rate within the September range as the FOMC pursues a restrictive policy.

EUR/USD Rate Daily Chart

Source: Trading View

• EUR/USD trades to a fresh monthly high (1.0094) following the failed attempt to test the yearly low (0.9536), and the recent series of higher highs and lows may push the exchange rate back towards 1.0070 (161.8% expansion) as it holds above the 50-Day SMA (0.9888).
• It seems as though EUR/USD will no longer respond to the negative slope in the moving average as it clears the opening range for October, but lack of momentum to hold above the indicator may keep the exchange rate within the September range.
• Failure to hold above 1.0070 (161.8% expansion) may push EUR/USD back below the 0.9910 (78.6% retracement) to 0.9950 (50% expansion) region, with a move below the monthly low (0.9632) bringing the yearly low (0.9536) back on the radar.

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong