The European Central Bank will be in focus for the day as markets look for guidance; dollar weakness has been the backbone of euro strength, will this last? The long-wicked candle and bearish divergence may suggest a weaker outlook for the euro.
Euro Fundamentals Background
The euro continues to receive fundamental support from the US and the euro zone. Higher inflation in the euro zone, lower energy costs and hawkish central banks have all supported the euro. While the ECB has been late to the rate hike cycle (relative to other major central banks), it has been very aggressive of late. Yesterday, ECB official Villeroy strongly defended President Lagarde’s forward guidance, favoring a 50 basis point hike at the next meeting. Earlier in the day, another ECB official, Nott, insisted on aggressive rhetoric, saying that the ECB is planning to raise interest rates by 50 basis points multiple times.
The ECB meeting minutes are about to take center stage in markets. The minutes are expected to send a hawkish signal, which could see EUR/USD gain bets.
From a dollar perspective, the recently released U.S. producer price index and retail sales were weaker than expected, market concerns about U.S. economic growth have weighed on the dollar, and it is now almost certain that the Fed will raise interest rates at the February rate decision 25 basis points. Hawkish Fed officials are currently largely ignored by the market, and the recent speeches of the Fed’s Collins, Brainard and Williams may face the same situation. U.S. December building permits data is expected to rise from extreme lows in November; if the actual data is in line with expectations, it may restrain the dollar’s upside.
EUR/USD Economic Calendar
Chart source: DailyFX Economic Calendar
EUR/USD daily chart
Chart source: IG, drawn by Warren Venketas
EUR/USD daily price action suggests a recent sideways move; however, yesterday’s long upper shadow could lead to a subsequent downside, but fundamentals must allow for such a move. The rapid recovery of the euro to April 2022 levels in about 3.5 months may be why the bulls are so cautious about pushing the market higher. The RSI echoed this sentiment, with upward momentum showing signs of slowing (i.e. a bearish divergence). A slightly dovish view from the ECB President’s speech or the ECB minutes could trigger the market lower.
IG Client Sentiment: Bearish
The IGCS Client Sentiment Index shows that retail investors are currently bearish on EUR/USD; as of writing, 58% of retail investors are currently net short. Retail sentiment is generally considered a contrarian indicator; given recent changes in long and short positioning, we see a short-term bullish bias for EUR/USD. (Written by Warren Venketas and translated by Ashley)
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