Talking Points on EUR / USD Rates

EUR / USD is trading at a new monthly low (1.1672) as it charts a new series of higher highs and lower lows, but the exchange rate may continue to defend the annual low (1.1664) as the Eurozone consumer price index (CPI) update is expected to show a pickup in inflation.

EUR / USD defends 2021 low ahead of Eurozone inflation report

EUR / USD struggles to hold on following the knee-jerk reaction to the Federal Reserve decision on interest rates, and speculation about an imminent change in US monetary policy could keep the exchange rate under pressure as the European Central Bank (ECB) relies on its non-standard tools to support monetary union.

Final remarks from the President of the ECB Christine Lagarde suggest Governing Council in no rush to remove emergency measures as officials brace for “”a phase of temporary inflation linked to the reopening“, The director of the central bank added that”we still need an accommodating monetary policy to exit the pandemic safely and bring inflation down to 2% in the long term»Speaking to the ECB Central Bank Forum.

In turn, Lagarde maintains that “mmonetary policy should normally look through temporary supply-induced inflation, as long as inflation expectations remain anchored, and it looks like the ECB will continue to adopt an accommodating tone in its next rate decision on October 28 becauseThe main challenge is to ensure that we do not overreact to transient supply shocks that have no impact in the medium term.. “

However, the update of the Eurozone Consumer Price Index (CPI) could put pressure on the ECB to adjust the forward guidance of monetary policy, as the headline inflation figure is expected. increase for the third consecutive month, while the core CPI is expected. to widen to 1.9% against 1.6% per year in August.

As a result, signs of accelerating inflation could trigger a bullish reaction from the euro as the ECB plans to achieve “a rate of net asset purchases moderately lower than the emergency pandemic purchasing program (PEPP) compared to the two previous quarters”, but a further decline in EUR / USD could fuel tilt in retail sentiment like the behavior seen earlier this year.

Image of IG client sentiment for the EUR / USD rate

The IG Client Sentiment Report shows 64.88% of traders are currently net-long EUR / USD, with the ratio of long / short traders upright to 1.85 to 1.

The number of net-long traders is 1.60% higher than yesterday and 8.31% higher than last week, while the number of net-short traders is 1.69% lower at that of yesterday and 6.76% lower than last week. The rise in net long interest fueled the tilt in retail sentiment, with 60.27% of traders being net long EUR / USD last week, while the decline in the net short position could be a function of profit-taking behavior because the exchange rate Trading at new monthly low (1.1672).

That said, recent price action raises the possibility of a further fall in EUR / USD as it carves out a new series of higher highs and lower lows, butthe exchange rate could continue to defend annual low (1.1664) if the euro area CPI report indicates a broader recovery in price growth.

Daily EUR / USD rate chart

Image of the daily EUR / USD rate chart

Source: Trading view

  • Keep in mind that EUR / USD is below the 200 day SMA (1.1972) for the first time since April, as the advance from the March low (1.1704) failed to test the January high (1.3250) as the exchange rate traded at a new annual low (1.1664) in August as the 50-Day SMA (1.1781) established a negative slope.
  • Recent price action increases the possibility of a further fall in EUR / USD as it carves out a new round of lower highs and lows, but the exchange rate may trade within a range defined as it seems defend the annual low (1.1664).
  • THElack of momentum to break below Fibonacci overlap around 1.1670 (78.6% expansion) to 1.1710 (61.8% retracement) could push EUR / USD back towards Region from 1.1780 (23.6% expansion) to 1.1810 (61.8% retracement), with a break above July high (1.1909) opening 1.1950 (23.6% retracement) at 1.1970 (23.6% expansion) Region.
  • However, the inability to defend the August trough (1.1664) shows region 1.1640 (50% expansion) on the radar, with the next area of ​​interest around 1.1580 (61.8% expansion).

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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