EUR/USD Outlook Weakens as US Yields Soar, ECB Rows Back Expectations

EUR/USD Price, Chart, and Analysis

• EUR/USD is set to struggle to push significantly higher.
• Interest rate differentials between the USD and Euro will widen further.

Thursday’s red hot US CPI print of 7.5% and subsequent hawkish Fed speak, sparked a sharp rally in US Treasury yields that saw the rate-sensitive UST 2 year hit a multi-year high of 1.64%. The four-decade high level of inflation sparked a round of hawkish Fed speak with St. Louis Fed President James Bullard calling for 100 basis points of rate hikes by July 1, including a 50 basis point hike at the next Fed meeting in March. The market is now pricing in seven rate hikes in 2022 as the central bank tries to dampen down rampant price pressures in the US.

While the Federal Reserve is in full-blown hawk mode, the European Central Bank (ECB) is looking to dampen down expectations of aggressive monetary tightening. Last week’s ECB meeting, and subsequent ‘sources reports’, gave the impression that the central bank will start hiking rates and commencing quantitative tightening sooner than had been expected, boosting the value of the single currency. Since this meeting, various ECB policymakers have tried to row back these expectations, leaving the Euro vulnerable to further sell-offs against the US dollar as the interest rate differential between the two currencies widens in the favor of the greenback.

EUR/USD is struggling to reclaim 1.1400 and looks set for a period of consolidation over the next few days. The recent high of just under 1.1500 is unlikely to be broken in the current environment, unless there is another turnaround from either the Fed or the ECB, while the downside for the pair also looks limited with a cluster of prior lows all situated around 1.1265.

EUR/USD Daily Price Chart – February 11, 2022

Retail trader data show 45.36% of traders are net-long with the ratio of traders short to long at 1.20 to 1. The number of traders net-long is 9.50% lower than yesterday and 3.06% higher from last week, while the number of traders net-short is 23.55% lower than yesterday and 14.53% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/USD price trend may soon reverse lower despite the fact traders remain net-short.

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