EUR/USD post-ECB rally looks high in January with US NFP report on tap


Talking Points EUR/USD Rate

EUR/USD rises to new monthly high (1,1451) as the European Central Bank (ECB) adjusts monetary policy forward guidance, and the exchange rate may trade to new annual highs as it appears on track to reach the January high. testing (1.1483).

EUR/USD post-ECB rally looks high in January with US NFP report on tap

EUR/USD extends its advance from its January low (1.1121) as the ECB plans topandemic Eemergency pbargain pprogram (PEPP) at the end of Marchand it looks like the central bank will switch later this year if “inflation is likely to remain elevated for longer than previously expected.”

The aggressive tone suggests the ECB will lift benchmark interest rates from record lows in 2022 as the central bank promises “adjust all our instruments where necessary to ensure inflation stabilizes at the 2% target in the medium term”, and the Board of Directors can prepare a more detailed exit strategy in the coming months as president Christine Lagarde vows to “take the right steps at the right time.”

As a result, speculation about impending regime change could give the euro a boost President Lagarde acknowledges that the “situation has changed”, and it appears that the ECB will continue to adjust forward guidance in 2022, as the central bank will release new forecasts at its next meeting on March 10.

Image of Referus US economic calendar

Until then, the EUR/USD could make a larger correction if it looks on track to test the January high (1.1483)and it remains to be seen whether the US Non-Farm Payrolls (NFP) report will derail recent exchange rate gains as the economy is expected to add 150,000 jobs in January.

However, another weaker than expected NFP report could keep the EUR/USD afloat as it puts pressure on the Federal Reserve to delay normalizing monetary policy, and further appreciation in the exchange rate could fuel the recent reversal in retail sentiment, like last year’s behavior .

Image of IG Client Sentiment for EUR/USD rate

The IG Client Sentiment Report shows 42.73% of traders are currently net-long EUR/USD with the ratio between traders short and long to stand at 1.34 to 1.

The number of net long traders is down 23.89% from yesterday and 42.80% from last week, while the number of net short traders is 18.82% higher than yesterday and 72.01% higher than last week. The decline in the net long position comes as EUR/USD rises to a new monthly high (1,1451)while the jump in net short yields has led to a shift in retail sentiment as 63.80% of traders were net long on the pair last week.

That said, it remains to be seen whether the progress from January low (1.1121) will prove to be a correction in the broader trend as the Federal Open Market Committee (FOMC) appears to be decreasing its balance sheet in 2022, but the exchange rate may trade to new annual highs as it appears on track to test the January high (1.1483).

Daily chart EUR/USD rate

Image of the EUR/USD daily rate

Source: Trading Display

  • Note that EUR/USD traded to new annual lows in the second half of 2021, as the advance from the March low (1.1704) failed to test the January high (1.2350), and the bearish trend seems set. to be to hold as the 200 days SMA (1.1680) retains the negative slope carried over from last year.
  • EUR/USD clears the . to erase Lowest July 2020 (1.1185) after failing to defend the 2021 range, but lack of momentum to break/close below the 1.1120 (50% expansion) region led to a short-term correction in the exchange rate, with the break/close above 1.1290 (61.8% retracement) to 1.1310 (100% expansion) zone Euro Dollar to the push High in January (1.1483).
  • EUR/USD could trade to new annual highs if it manages toTransparent the Fibonacci overlap around 1.1450 (50% retracement) to 1.1490 (50% retracement)breaking above the November high (1,1609), opening the region from 1.1670 (78.6% expansion) to 1.1710 (61.8% retracement), corresponding to the October high (1.1692).
  • However, do not break/close above the Fibonacci overlap around 1.1450 (50% retracement) to 1.1490 (50% retracement) EUR/USD may hold within the January range, moving below the 1.1290 (61.8% retracement) to 1.1310 (23.6% expansion) region, bringing it 1.1190 (38.2% retracement) to 1.1220 (78. 6% retracement) area comes back on the radar.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong