EUR/USD Rate Talking Points
EUR/USD climbs to a fresh monthly high (1.2149) as it breaks out of the descending channel from earlier this year, with recent developments in the Relative Strength Index (RSI) indicating a further appreciation in the exchange rate as the oscillator clears the downward trend from December.
EUR/USD Bullish Price Sequence Leads to Break of Descending Channel
EUR/USD extends the series of higher highs and lows from the monthly low (1.1952) even though European Central Bank President Christine Lagarde pledges to “act for as long as the pandemic is causing a crisis situation in the euro area,” and the decline from the January high (1.2350) appears to be to have been a correction in the broader trend rather than a change in behavior as the US Dollar still reflects an inverse relationship with investor confidence.
As a result, swings in risk appetite may continue to sway EUR/USD as the Federal Reserve remains 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,” and it seems as though the Federal Open Market Committee (FOMC) is in no rush to alter the course for monetary policy as Chairman Jerome Powell warns that “we are still very far from a strong labor market” while speaking at an event hosted by the Economic Club of New York.
At the same time, Chairman Powell insists that “we will not tighten monetary policy solely in response to a strong labor market” as the Fed plans to “achieve inflation that averages 2 percent over time,” and it seems as though the FOMC will continue to utilize its balance sheet in 2021 as the US Non-Farm Payrolls (NFP) report shows a 49K expansion in January.
In turn, EUR/USD may stage a larger recovery ahead of the next FOMC interest rate decision on March 17 as key market themes remain in place, with the crowding behavior from 2020 resurfacing as the recent shift in retail sentiment quickly fades.
The IG Client Sentiment report shows 40.05% of traders are currently net-long EUR/USD, with the ratio of traders short to long standing at 1.50 to 1.
The number of traders net-long is 0.86% lower than yesterday and 13.09% lower from last week, while the number of traders net-short is 5.03% higher than yesterday and 18.97% higher from last week. The crowding behavior appears to be abating as only 38.19% of traders were net-long EUR/USD at the start of the week, but the rise in net-short interest suggests the tilt in retail sentiment is likely to persist even though the exchange rate climbs to a fresh monthly high (1.2149).
With that said, the decline from the January high (1.2350) may 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, with recent developments in the Relative Strength Index (RSI) indicating a further appreciation in the exchange rate as the oscillator 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 carried over from the end of July 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 (1.2152) for the first time since November
- Nevertheless, EUR/USD has broken out of the descending channel from earlier this year as it extends the series of higher highs and lows from the monthly low (1.1952), with the RSI highlighting a similar dynamic as it appears to be threatening the downward trend carried over from December.
- Need a break/close above the Fibonacci overlap around 1.2140 (50% retracement) to 1.2370 (61.8% expansion) to bring the 1.2220 (38.2% expansion) to 1.2260 (161.8% expansion) region on the radar, with the next area of interest coming in around 1.2320 (23.6% retracement) to 1.2370 (61.8% expansion).
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— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong