EUR/USD Pressured by Widening Rate Differentials

EUR/CHF, AUD/USD Analysis and News:

• Euro Weighed as Policy Divergence Returns
• Client Sentiment Signal a Mixed Outlook

Euro Weighed as Policy Divergence Returns

Yesterday’s testimony from Fed Chair Powell, more or less confirmed that a 25bps rate hike will take place at the upcoming Fed meeting. Although, while Powell signalled an openness to a larger hike, this would likely occur in the event that inflation persisted in the latter half of the year. In turn, with the Federal Reserve sticking to its tightening path, alongside the Bank of Canada who yesterday raised rates by 25bps, focus is once again back on policy divergence with the likes of the ECB. A reminder that given the current geopolitical backdrop, the ECB’s plans for considering tighter policy have been derailed with central bank facing a trade-off between a build-up in inflation pressures as indicated by yesterday’s record high inflation print at 5.8% and a hit to economic growth. For now, as US-GE spreads continue to widen, risks remain tilted to the downside for the Euro, particularly against CAD, NZD AUD which have benefitted from the surge in commodity prices. Headline risk will remain however, with focus on the upcoming second round of talks between Russian and Ukrainian delegation teams.

EURUSD Chart: Daily Time Frame

Source: Refinitiv

Client Sentiment Signal a Mixed Outlook

Data shows 67.04% of traders are net-long with the ratio of traders long to short at 2.03 to 1. The number of traders net-long is 1.81% higher than yesterday and 24.24% higher from last week, while the number of traders net-short is 3.74% higher than yesterday and 18.54% 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.

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