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EUR/USD Rate Clears 2020 Low Ahead of Euro Area Inflation Report – By ASC


EUR/USD Rate Discussion Points

EUR/USD surpassed the 2020 low (1.0636) as it extended a series of lower highs and lows from last week, but an update to the Eurozone Consumer Price Index (CPI) may generate a rebound in the exchange rate as inflation is expected to rise for third month in a row.

EUR/USD Rate Clears 2020 Low Ahead of Euro Area Inflation Report

EUR/USD traded to a new annual low (1.0635) on the back of the strength of the US Dollar, with the recent weakness in the exchange rate pushing the Relative Strength Index (RSI) into oversold territory for the second time this year.

A move below 30 in the RSI increases the scope for further declines in EUR/USD as the bearish momentum picks up, and it remains to be seen if another increase in Euro Area CPI will curb weakness in the exchange rate as the core rate is expected to rise to 3.2% from 2.9% per annum in March.

Evidence of persistent inflation can be compelling European Central Bank (ECB) adjust forward guidance for monetary policy as President Christine Lagarde and Co. acknowledges that “inflation has increased significantly and will remain high in the coming months,and speculation for a towering a shift in ECB policy may generate a short -term rebound in EUR/USD as more and more officers of the Governing Council show greater to implement higher interest rates.

Nevertheless, EUR/USD may continue to show a downtrend in 2022 as the Federal Reserve appears to be on track to deliver a 50bp rate hike on its next rate decision on May 4, but further declines in the exchange rate are likely to push up a tilt in retail sentiment such as behavior seen earlier this year.

IG Customer Sentiment Image for EUR/USD rate

The IG Customer Sentiment Report show 76.32% of traders are at this time the length of the net EUR/USD, with a long to short trader ratio stand up at 3.22 to 1.

The number of net-long traders was 2.76% higher than yesterday and 0.13% higher than last week, while the number of net-short traders was 3.01% higher than yesterday and 15.22% lower than last week. The increase in net long interest has triggered congestion behavior as 68.72% of traders were EUR/USD net during the first full week of April, while the decline in net short position could be a function of profit -taking behavior as the exchange rate traded to new annual lows (1.0635) .

Thus, another increase in Euro Area CPI may restrain recent selling in EUR/USD as it puts pressure on the ECB to change gears, but the exchange rate may try to test the April 2017 low (1.0569) as indicated by the RSI momentum price declines accumulate rate.

EUR/USD Rate Daily Chart

Daily chart image of EUR/USD rate

Source: Trade Outlook

  • The broader outlook for EUR/USD remains downward as the 200-Day SMA (1.1393) still reflects a negative slope, with the recent decline in the exchange rate prompted Relative Strength Index (RSI) into oversold territory for the second time this year when it disappeared 2020 lows (1,0636).
  • Need a close below the 1.0640 area (78.6% expansion) to carry April 2017 low (1,0569) on the radar, with a breakout/close below the 1.0500 handle (100% expansion) increases the scope for testing March 2017 Low (1,0495).
  • However, there is a lack of momentum to close below 1,0640 (78.6% expansion) may curb the recent series of highs and lows in EUR/USD, with a reversal movement above 1.0760 (61.8% expansion) to 1.0780 (100% expansion) area bring 1.0840 (50% expansion) to 1.0860 (23.6% shift) area back in the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

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