EUR/USD Risks Larger Pullback Amid Failure To Fill January 2015-Gap

EUR/USD Risks Larger Pullback Amid Failure To Fill January 2015-Gap

Talking Points:

- EUR/USD Risks Larger Pullback Amid Failure to Fill January 2015-Gap.

- NZD/USD Correction Unfolds Ahead of RBNZ; Bearish RSI Trigger to Offer Confirmation.

-DailyFX 3Q Forecasts Are Now Available.

DailyFX Table

Ticker

Last

High

Low

Daily Change (pip)

Daily Range (pip)

EUR/USD

1.1791

1.1814

1.1766

20

48

The Euro outperforms its major counterparts following the U.S. Non-Farm Payrolls (NFP) report, but the recent series of lower-highs in EUR/USD raises for a larger pullback amid the failed attempt to fill-in the gap from January-2015 (1.2000 down to 1.1955).

The shift in EUR/USD behavior may continue unfold over the coming months as European Central Bank (ECB) drops its dovish tone and appears to be on course to taper the quantitative easing (QE) program ahead of the December deadline. Nevertheless, Federal Reserve officials may continue to endorse three rate-hikes for 2017 amid the recent pickup in household earnings accompanied by the ongoing expansion in job growth.

In turn, Chair Janet Yellen and Co. may endorse a more aggressive approach in normalizing monetary policy, and the dollar may stage a near-term recovery ahead of the next interest rate decision on September 20 as ‘the Committee expects to begin implementing its balance sheet normalization program relatively soon.’ However, Fed officials may adopt a less-hawkish tone as Chair Yellen argues ‘the federal funds rate would not have to rise all that much further to get to a neutral policy stance,’ and the dollar may face a more bearish fate over the coming months should the fresh forecast coming out of the central bank drag on interest-rate expectations.

EUR/USD Daily Chart

EUR/USD Daily Chart

Chart - Created Using Trading View

  • Downside targets are back on the radar as EUR/USD pulls back from the monthly-high (1.1910) and initiates a series of lower-highs; the Relative Strength Index (RSI) also highlights a similar dynamic as the oscillator falls back from overbought territory.
  • A close below the 1.1770 (100% expansion) hurdle may spur a move back towards 1.1670 (50% retracement), with the next downside region of interest coming in around 1.1580 (100% expansion) followed by the Fibonacci overlap around 1.1480 (78/6% expansion to 1.1500 (78.6% expansion).
  • Keep in mind, the broader shift in EUR/USD behavior may continue take shape throughout the second-half of 2017 as both price and the RSI still preserve the bullish formations from earlier this year.

Ticker

Last

High

Low

Daily Change (pip)

Daily Range (pip)

NZD/USD

0.7353

0.7422

0.7352

56

70

NZD/USD remains under pressure ahead of the Reserve Bank of New Zealand’s (RBNZ) August 9 meeting, with the pair at risk of facing a near-term correction as it struggles to preserve the bullish trend carried over from earlier this year.

The interest rate decision may yield a limited market reaction as the RBNZ is widely expected to keep the official cash rate at the record-low of 1.75%, but the accompanying policy statement may drag on the New Zealand dollar should the central bank show a greater willingness to retain the wait-and-see approach beyond Governor Graeme Wheeler’s departure in September. At the same time, the RBNZ may follow a similar approach to its Australian counterpart and toughen the verbal intervention on the local current as ‘a lower New Zealand dollar would help rebalance the growth outlook towards the tradables sector.’

Unless the RBNZ drops its cautious outlook, NZD/USD may continue to exhibit a bearish behavior over the coming days as the central bank appears to be in no rush to normalize monetary policy.

NZD/USD Daily Chart

NZD/USD Daily Chart

Chart - Created Using Trading View

  • Downside targets are on the radar for NZD/USD as it fails to retain the upward trend from May, with the pair at risk for a larger correction should the former-resistance zone around 0.7330 (38.2% retracement) to 0.7350 (23.6% expansion) fail to offer support.
  • At the same time, the Relative Strength Index (RSI) may flash a bearish trigger as it falls back towards trendline support; failure to preserve the bullish formation from March to provide confirmation/conviction for a larger correction in NZD/USD should the momentum indicator highlight a similar dynamic as the exchange rate.
  • Next downside region of interest comes in around 0.7240 (61.8% retracement) 0.7280 (61.8% retracement) followed by the Fibonacci overlap around 0.7190 (50% retracement) to 0.7200 (38.2% retracement).

Retail FX Sentiment

Retail FX Sentiment

Track Retail Sentiment with the New Gauge Developed by DailyFX Based on Trader Positioning

  • Retail trader data shows 28.3% of traders are net-long EUR/USD with the ratio of traders short to long at 2.54 to 1. In fact, traders have remained net-short since April 18 when EUR/USD traded near 1.06524; price has moved 10.7% higher since then. The number of traders net-long is 16.2% higher than yesterday and 27.2% higher from last week, while the number of traders net-short is 18.0% higher than yesterday and 1.5% higher from last week.
  • Retail trader data shows 25.9% of traders are net-long NZD/USD with the ratio of traders short to long at 2.87 to 1. In fact, traders have remained net-short since May 24 when NZD/USD traded near 0.68562; price has moved 7.3% higher since then. The number of traders net-long is 17.7% higher than yesterday and 2.5% higher from last week, while the number of traders net-short is 4.8% higher than yesterday and 12.3% higher from last week.
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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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