EUR/USD Rate Pullback Emerges Ahead of Account of ECB Meeting

EUR/USD Rate Talking Points

EUR/USD extends the pullback from the monthly high (1.2170) as the update to the US Retail Sales report sparks a bullish reaction in the Greenback, but the broader outlook remains constructive as the exchange rate breaks out of the descending channel from earlier this year.

EUR/USD Rate Pullback Emerges Ahead of Account of ECB Meeting

EUR/USD trades back below the 50-Day SMA (1.2150) as the rebound from the monthly low (1.1952) unravels, but the account of the European Central Bank’s (ECB) January meeting may curb the recent decline the exchange rate as the Governing Council plans to carry out the pandemic emergency purchase programme (PEPP)until at least the end of March 2022, with a total envelope of EUR 1.850 trillion.

It seems as though the ECB is in wait-and-see mode after expanding the PPEP by EUR 500B at its last meeting for 2020, and the transcript from the January meeting may ultimately tame speculation for additional monetary support as the central bank insists that “the risks surrounding the euro area growth outlook remain tilted to the downside but less pronounced.”

In turn, the ECB may stick to the same script at its next meeting on March 11 as President Christine Lagarde emphasizes that “our preferred tool is the pandemic emergency purchase programme,” and it seems as though the Governing Council will rely on its current measures to safeguard the Euro Area as European policymakers prepare to distribute the EUR 750B Next Generation EU recovery fund starting in 2021.

As a result, key market themes may continue to sway EUR/USD as both the ECB and Federal Reserve rely on their balance sheets to achieve their policy targets, and the US Dollar may continue to reflect an inverse relationship with investor confidence as the Federal Open Market Committee (FOMC) stays on track to “increase our holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month.”

Meanwhile, the crowding behavior from 2020 has resurfaced amid the recent shift in retail sentiment, with the IG Client Sentiment report showing 47.04% of traders currently net-long EUR/USD as the ratio of traders short to long stands at 1.13 to 1.

The number of traders net-long is 8.36% higher than yesterday and 3.84% higher from last week, while the number of traders net-short is 4.25% lower than yesterday and 19.28% lower from last week. The rise in net-long interest has helped to alleviate the crowding behavior in EUR/USD as only 40.05% of traders were net-long during the previous week, while the decline in net-short position could be a function of profit-taking behavior as EUR/USD extends the pullback from the monthly high (1.2170).

With that said, it remains to be seen if the decline from the January high (1.2350) will turn out to be a correction in the broader trend rather than a change in EUR/USD behavior as it breaks out of the descending channel from earlier this year, and the exchange rate may make further attempts to climb back above the 50-Day SMA (1.2150) as the Relative Strength Index (RSI) clears the downward trend from December.

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EUR/USD Rate Daily Chart

Source: Trading View

• Keep in mind, the EUR/USDcorrection from the September high (1.2011) proved to be an exhaustion in the bullish price action rather than a change in trend following the string of failed attempts to close below the 1.1600 (61.8% expansion) to 1.1640 (23.6% expansion) region, with the Relative Strength Index (RSI) highlighting a similar dynamic as it broke out of the downward trend to recover from its lowest readings since March.
• The break/close above the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region pushed EUR/USD to a fresh yearly highs throughout December, with the exchange rate taking out the 2020 high (1.2310) during the first week of January.
• However, EUR/USD snapped the opening range for 2021 following the failed attempt to test the April 2018 high (1.2414), with the exchange rate trading below the 50-Day SMA (1.2350) for the first time since November.
• It remains to be seen if the decline from the January high (1.2350) will manifest into a change in EUR/USD behavior as the exchange rate struggles to hold above the 50-Day SMA (1.2350), with a break/close below the 1.2010 (100% expansion) area bringing the 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion) region back on the radar.
• Need a move back above the 1.2080 (78.6% retracement) area to open up the Fibonacci overlap around 1.2140 (50% retracement) to 1.2170 (61.8% expansion), with the next region on interest coming in around 1.2220 (38.2% expansion) to 1.2260 (161.8% expansion).

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— Written by David Song, Currency Strategist

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