EUR/USD Rebound Fizzles Ahead of 50-Day SMA

EUR/USD Rate Talking Points

EUR/USD carves a series of lower highs and lows as it continues to pull back from the weekly high (0.9876), and the exchange rate may depreciate over the coming days as the rebound from the monthly low (0.9632) appears to have stalled ahead of the 50-Day SMA (0.9902).

EUR/USD Rebound Fizzles Ahead of 50-Day SMA

EUR/USD may mirror the price action from earlier this month as it struggles to test the moving average, and the exchange rate may continue to track the negative slope in the indicator as Federal Reserve officials plan to carry the hiking-cycle into 2023.

Philadelphia Fed President Patrick Harker, who votes on the Federal Open Market Committee (FOMC) next year, reveals that he expects US interest rates to be “well above 4 percent by the end of the year,” with the official going onto say that “sometime next year, we are going to stop hiking rates” while speaking at the Greater Vineland Chamber of Commerce.

The comments suggest the FOMC will retain its existing approach in combating inflation as Harker acknowledges that “inflation is known to shoot up like a rocket and then come down like a feather,” and it remains to be seen if the European Central Bank (ECB) will strike a similar tone at its next interest rate decision on October 27 as the Governing Council is expected to deliver another 75bp rate hike.

However, the threat of a recession in the Euro Area may limit the ECB’s scope to implement higher interest rates as the economy is expected to “stagnate later in the year and in the first quarter of 2023,” and President Christine Lagarde and Co. may deliver smaller rate hikes over the remainder of the year as the Governing Council shows little interest in carrying out a restrictive policy.

Until then, EUR/USD may struggle to retain the rebound from the monthly low (0.9632) as it struggles to push above the moving average, while the tilt in retail sentiment looks poised to persist as traders have been net-long the pair for most of the year.

The IG Client Sentiment (IGCS) report shows 56.55% of traders are currently net-long EUR/USD, with the ratio of traders long to short standing at 1.30 to 1.

The number of traders net-long is 2.48% lower than yesterday and 8.15% higher from last week, while the number of traders net-short is 4.38% higher than yesterday and 10.16% higher from last week. The rise in net-long interest has fueled the crowding behavior as 52.68% of traders were net-long EUR/USD earlier this week, while the rise in net-short position comes as the exchange rate continues to pull back from the weekly high (0.9876).

With that said, EUR/USD may continue to carve a series of lower highs and lows as it gives back the advance from the monthly low (0.9632), and the exchange rate may continue to track the negative slope in the 50-Day SMA (0.9902) to largely mirror the price action from earlier this month.

EUR/USD Rate Daily Chart

Source: Trading View

• EUR/USD appears to be reversing ahead of the 50-Day SMA (0.9902) as it continues to pull back from the weekly high (0.9876), and failure to defend the monthly low (0.9632) may push the exchange rate towards the yearly low (0.9536).
• A break/close below the 0.9530 (61.8% expansion) area opens up the Fibonacci overlap around 0.9380 (261.8% expansion) to 0.9430 (261.8% expansion), with the next area of interest coming in around the June 2002 low (0.9303).
• However, EUR/USD may continue to consolidate as long as it defend the monthly low defend the monthly low (0.9632), and the exchange rate may stage further attempts to test the moving average, with a move above the 0.9910 (78.6% retracement) to 0.9950 (50% expansion) region bringing the monthly high (1.000) on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong