After ECB, Ranges Prevail in EUR/GBP, EUR/JPY, EUR/USD

Euro Outlook:

• The September ECB rate decision brought no surprises as the small adjustment to the QE program was telegraphed well in advance.
• The drop in US Treasury yields is outpacing that of European yields, giving levity to EUR/USD rates, while sinking EUR/GBP and EUR/JPY along the way.
• Per the IG Client Sentiment Index, EUR/GBP and EUR/USD have bearish biases while EUR/JPY is neutral.

“The Lady isn’t Tapering”

In an echo of a 1980 statement made by then-UK Prime Minister Margaret Thatcher, European Central Bank President Christine Lagarde commented today that “the lady isn’t tapering.” Consistent with the famous Thatcher comment regarding an adjustment to her government’s economic policies – “the lady is not for turning” – the ECB isn’t wavering from its current set course of action.

Indeed, while an adjustment of sorts has been made to the ECB’s bond buying program as the Eurozone economy builds through its “rebound” phase of the pandemic, the news that the ECB would return its QE pace to that prior to March 2021 suggests substantial monetary stimulus is still on its way. As ECB President Lagarde reminded repeatedly, this isn’t a “taper.”

The lack of tapering news isn’t much of a surprise to markets, but global bonds have taken the information with glee, with yields in sovereign bond markets dropping on the session. The pullback in Eurozone yields has been outpaced by those in US Treasuries, giving EUR/USD some levity while other EUR-crosses pullback more substantially.

In sum, the rangebound conditions seen in the major EUR-crosses are unlikely to abate for the foreseeable future. While both EUR/JPY and EUR/USD rates have only recently backed away from their July swing highs, EUR/GBP rates appear to be making a bit more progress towards their summer lows. But with measures of volatility well-contained for the time being, traders may not want to anticipate any explosive moves – in either direction – in the short-term.

EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to August 2021) (CHART 1)

After touching their July high at 1.1909 at the start of September, EUR/USD rates have been on a steady downward trajectory before finding support at their daily 21-EMA today. This may be an early tell that the market is set to return back to its monthly high, but as has been the case for the past quarter, the series of ‘lower highs and lower lows’ remains in place.

IG Client Sentiment Index: EUR/USD Rate Forecast (September 9, 2021) (Chart 2)

EUR/USD: Retail trader data shows 47.29% of traders are net-long with the ratio of traders short to long at 1.11 to 1. The number of traders net-long is 10.23% higher than yesterday and 1.11% higher from last week, while the number of traders net-short is 10.75% lower than yesterday and 6.61% 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.

EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (April 2020 to August 2021) (CHART 3)

Consistent with declining bond yields that tilts favor towards the Japanese Yen, EUR/JPY rates have experienced a more significant setback than their EUR/USD counterpart. While EUR/USD has found support at its daily 21-EMA, EUR/JPY rates are starting to break through theirs, suggesting that weaker price action may be developing henceforth. Momentum indicators are starting to take a bearish turn, suggesting that more losses towards the 50% Fibonacci retracement of the 2014 high/2016 low range at 129.50 may arrive quickly in the near-term, before the 38.2% Fibonacci retracement of the 2018 high/2020 low range at 128.68 comes into focus.

IG Client Sentiment Index: EUR/JPY Rate Forecast (September 9, 2021) (Chart 4)

EUR/JPY: Retail trader data shows 35.04% of traders are net-long with the ratio of traders short to long at 1.85 to 1. The number of traders net-long is 1.44% lower than yesterday and 1.44% lower from last week, while the number of traders net-short is 1.94% lower than yesterday and 8.35% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/JPY prices may continue to rise.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/JPY trading bias.

EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (August 2020 to August 2021) (CHART 5)

With the British Pound proving resurgent through the middle of the week, EUR/GBP rates have seen more technical damage occur than either the aforementioned pairs. EUR/GBP has seen price action slice below its daily 5-, 8-, 13-, and 21-EMA envelope, losing the 76.4% Fibonacci retracement of the 2020 low/2020 high range at 0.8569 in the process. Daily MACD has already begun its turn lower (albeit still above its signal line), while daily Slow Stochastics are quickly dropping towards their median line. A deeper setback below 0.8500 isn’t out of the question in the coming days.

IG Client Sentiment Index: EUR/GBP Rate Forecast (September 9, 2021) (Chart 6)

EUR/GBP: Retail trader data shows 59.20% of traders are net-long with the ratio of traders long to short at 1.45 to 1. The number of traders net-long is 1.33% lower than yesterday and 1.17% higher from last week, while the number of traders net-short is 22.05% lower than yesterday and 28.88% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/GBP prices may continue to fall.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/GBP-bearish contrarian trading bias.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist