Talking Points on EUR / USD Rates

EUR / USD appears to be stuck in a narrow range with the Federal Reserve and European Central Bank (ECB) rate decision in sight later this week, but the Governing Council’s wait-and-see policy approach monetary policy could weigh on the euro as president Christine Lagarde and Co. are in no rush to introduce higher interest rates.

EUR / USD rate vulnerable to policy divergences between ECB and FOMC

EUR / USD is on a sideways trajectory after defending November low (1.1186) over the previous week, and it remains to be seen whether the Fed’s new projections will influence the broader exchange rate outlook as the central bank proceeds to its exit. strategy.

As a result, updating the Summary of economic projections (SEP) could show a steeper path for the fed funds rate as president Jerome Powell and co. “generally found that the Committee’s criterion of substantial progress had clearly been more than met with regard to inflation“, and the US dollar could continue to outperform its European counterpart in 2022 if the FOMC shows greater willingness to proceed with a rate hike sooner rather than later.

Meanwhile, the ECB could simply try to buy time at its last meeting of the year amid renewed restrictions in response to the Omicron variant, and the Governing Council could continue to prepare for a transitional increase in the price growth as officials “expect inflation to rise further in the near term, but then decline over the next year.“

In turn, the ECB could continue to support the euro area in 2022 as President Lagarde et Cie.expect inflation over the medium term to stay below our 2% targett, “the euro could face a more bearish fate over the next few months as long as the Governing Council remains on track to carry through”a moderately lower rate of net asset purchases under the Pandemic Emergency Purchase Program (PEPP) compared to the second and third quarters of this year. ”

Diverging paths between the ECB and FOMC could keep EUR / USD in a downtrend as it trades at new year-on-year lows in the second half of 2021, but the tilt in retail sentiment appears to be on the cusp of persist even if the exchange rate follows laterally after defending the November trough (1.1186).

the IG Customer Sentiment Report shows 64.05% of traders are currently net-long EUR / USD, with the ratio of long / short traders upright to 1.78 to 1.

The number of net-long traders is 5.49% higher than yesterday and 1.08% lower than last week, while the number of net-short traders is 7.76% higher at yesterday and 0.56% higher than last week. The decline in net long interest did little to alleviate crowding behavior, as 64.07% of traders were net long EUR / USD last week, while the rise in net short came as the rate of change seems to be stuck within a narrow range.

That said, EUR / USD could continue to consolidate in the monthly range amid central bank rate decisions coming later this week, but diverging paths between the ECB and FOMC could hold the exchange rate down. . in a downtrend as it trades at new year-on-year lows in H2 2021.

Daily EUR / USD rate chart

Source: Trading view

• Keep in mind that EUR / USD traded at new year-on-year lows in H2 2021 as progress from March low (1.1704) failed to test the high January (1.3250), and the downtrend looks set to continue. both the 50-day SMA (1.1460) and 200-day SMA (1.1795) reflect a negative slope.
• Nonetheless, a rebound appeared following the failed attempt to test the July 2020 low (1.1185), with EUR / USD trades within a defined range after defending November low (1.1186) during the first full week of December.
• Need a break above monthly high (1.1360) to bring the 1.1440 area (78.6% expansion) to 1.1450 (50% retracement) on the radar, with movement above the SMA 50 day (1.1460) opening Fibonacci overlap around 1.1490 (50% retracement) to 1.1540 (61.8% expansion).
• However, the lack of momentum to stay above the Region 1.1290 (61.8% retracement) to 1.1310 (100% expansion) may push EUR / USD towards the 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement) zone, with a break from the July 2020 low (1.1185) opening the Fibonacci overlap around 1.0930 (161.8% expansion) to 1.1000 (78.6% retracement).

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong