EUR/USD Price Outlook: Risks Mount to the Downside

[MongiIG]

EUR/USD, FED, ECB NEWS AND ANALYSIS

• Dollar remains supported on the back of ‘hawkish’ Powell comments
• EUR/USD edges lower after failed attempt to trade above 1.1150
• IG Client Sentiment suggests potential short-term lift in EUR/USD

Central Bankers Have Their Say

Rather hawkish remarks from Fed Chair Jerome Powell on Monday continue to reverberate throughout dollar pairs, as the greenback edges higher once more. On Monday Jerome Powell stated that the Fed will go for more aggressive rate hikes if needed, to curb inflation. He added the possibility of hiking more than 25 basis points “each time” if needed. That opened the door for money markets to shift rate hike expectations towards 50 basis points in May with increasing likelihood of a potential 50 basis point hike in June as well.

On the ECB front, we have already heard from Legarde Nagel and de Guindos that there are no signs of stagnation in the Eurozone economy. Nagel raised concerns over the risk of tightening policy too late and remains open to a potential rate hike this year. Rates markets currently anticipate just under 50 basis points of tightening before year end – a long way off the trajectory of the Fed with markets anticipating a further 180 bps this year.

Risk Events Ahead

There are a notable amount of Fed speakers to end off the week in the absence of significant scheduled event risk. Speakers include: Powell, Daly, Waller, Evans, Bostic, Williams and Barkin

Customize and filter live economic data via our DaliyFX economic calendar

EUR/USD KEY TECHNICAL LEVELS

The daily EUR/USD chart shows the failed attempt to trade above the 1.1150 mark in the aftermath of the Fed rate hike as the dollar softened slightly. Prices now appear to be heading lower once again, highlighting the recent low of 1.0805 which also happens to rest on the long-term trendline dating back to 2017.

A continuation in monetary policy divergence would raise the attractiveness of the higher yielding dollar in contrast to the negative yielding euro. If future Fed hikes are anywhere close to market expectations, the pair looks vulnerable to prolonged downside risks.

EUR/USD Daily Chart

Source: TradingView, prepared by Richard Snow

The weekly chart highlights the long-term trendline dating back to 2017 which acted as support earlier this month but could soon witness a retest.

EUR/USD Weekly Chart

Source: TradingView, prepared by Richard Snow

 

IG CLIENT SENTIMENT INDICATES POTENTIAL BULLISH REPRIEVE

• EUR/USD: Retail trader data shows 61.50% of traders are net-long with the ratio of traders long to short at 1.60 to 1.
• We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall.
• The number of traders net-long is 6.45% higher than yesterday and 2.48% lower from last week, while the number of traders net-short is 6.68% higher than yesterday and 15.06% higher from last week.
• Recent changes in sentiment warn that the current EUR/USD price trend may soon reverse higher despite the fact traders remain net-long.

 

 

 

--- Written by Richard Snow for DailyFX.com. 23rd March 2022