The EURUSD pair has started to stage a minor corrective move lower this week as the greenback comes back into favour, following last week’s major rally on the back of the Jackson Hole meeting and the NFP report results.
Euro traders are now braced for the European Central Bank policy meeting, with many possible outcomes existing which could potentially cause the single currency to sink or swim from the 1.1800 level.
Blackrock, the world’s largest investment management company have been laying out the various scenarios for the ECB policy meeting this week. Blackrock noted that they “Expect the central bank to reinforce a low-inflation outlook for the medium term, paving the way for additional easing in 2022 and further supporting our tactical preference for euro.”
They also go on to say that the “ECB may choose at its September meeting to reduce the pace of asset purchases under its pandemic emergency purchase program.” and that “Concerns that global financial conditions may tighten later this year around the likely start of the Fed’s taper of its asset purchases might persuade the ECB to leave the pace unchanged”.
If Blackrock are correct this could be bearish for the euro currency, although we do have to factor in that the ECB have recently been quite hawkish towards growth, although COVID-19 remains a lingering concern.
Given the downside risks I see the potential for more losses in the EURUSD pair, which could present a further buying opportunity for the pair at lower levels. Sentiment may need to fall from current levels as well.
The ActivTrader Market Sentiment tool shows that some 56 percent of traders are bearish towards the EURUSD. We probably need to see the herd turning ultra-bearish in order for the EURUSD pair to build a sustainable price rally.
If we consider the current sentiment metric it tells us very little, except those traders are largely undecided, which could also mean more range bound trading between the 1.1750 to 1.1900 price range.
EURUSD Short-Term Technical Analysis
The EURUSD pair is still unwinding from extremely overbought on the lower time frames and is undergoing some of a technical correction, with negative Relative Strength Index divergence reversing.
Negative divergence extends down towards the 1.1750 exists, so further losses towards this area is highly likely while the EURUSD pair remains capped under the 1.1890 resistance zone.
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EURUSD Medium-Term Technical Analysis
Looking at the daily time frame, upside failure around the 1.1900 level has occurred, making daily price closes around the 1.1845 area critical for the medium-term bull or bear case. A break under trendline support from a descending wedge is currently in progress.
We should expect to see a test towards the 1.1930 level if bulls start to close the daily candle above the 1.1845 level, alternatively, we should expect to see a test towards the 1.1730 level if bears continue to close the daily candle under the 1.1845 level.
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