EURUSD at Decision Point as the ECB’s Doves Weigh in

EUR/USD News and Analysis

Panetta warns of risks of overtightening and a preference for smaller rate hikes
EUR/USD at key decision point as the pair approaches support
Economic data skewed towards next week with ZEW and IFO sentiment data
The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

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Panetta Warns of Overtightening, Favors Smaller Rate Hikes

ECB Governing Council Member Fabio Panetta issued a cautious address, warning of possible overtightening at a time when he sees inflation falling below 3% by the end of the year.

Panetta, like Philip Lane who is scheduled to speak at 15:00, is a well-known dove within the ranks of the ECB rate setting committee and therefore, his comments aren’t too surprising. His comments, however, differ from the hawkish message communicated by all ECB members ahead of the January policy meeting in light of unacceptably high inflation.

Panetta added that, “we are seeing different conditions in financial markets than were feared just a few months ago”. EU services PMI data breached into ‘expansionary territory’ in January, Germany reported that they will avoid a gas crisis and inflation appears to have turned the corner. Risks to the euro appear via potentially faster disinflation in the Euro area, leading to a dovish repricing of the euro at the same time inflation proves stickier than anticipated in the US, having the opposite effect – driving treasury yields and the dollar higher.

EUR/USD Technical Considerations

EUR/USD has pulled back from its impressive advance due to better-than-expected US economic data. The real test of the pullback appears via the diagonal line of support, prior resistance.

With markets pricing in a terminal Fed funds rate of 5.22% compared to the Fed dot plot projection of 5.1% in December, further USD upside may be limited for now. In the event of a breakdown, 1.0615 is the next level of support, followed by 1.0450. Resistance lies at 1.0805 before the February swing high of 1.1033.

EUR/USD Daily Chart

Source: TradingView, prepared by Richard Snow

Institutional and Retail Sentiment Snapshots

Institutional sentiment shows a strong divergence between longs and shorts, with euro longs holding steady while shorts ease off. The favourable outlook in the euro can be attributed to better economic data and the avoidance of a gas crisis. However, more recent price action has seen EUR/USD turn lower as sticky inflation in the US and hot economic data sets the scene for a higher Fed funds terminal rate.

As such, US yields and the dollar received a bid, driving EUR/USD lower. The pair trades near support which keeps euro bulls in the game but a trendline break could see euro longs ease once more.

Source: Refinitiv, prepared by Richard Snow

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IG client sentiment

Source: TradingView, prepared by Richard Snow

EUR/USD: Retail trader data shows 51.25% of traders are net-long with the ratio of traders long to short at 1.05 to 1.

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

The number of traders net-long is 6.02% higher than yesterday and 2.95% higher from last week, while the number of traders net-short is 2.77% lower than yesterday and 2.16% higher from last week.

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

Major Risk Events

The economic calendar is rather light until next week’s ZEW economic sentiment and the final Euro inflation data for January. In the interim, there are a number of prominent central bank speakers from the ECB (Panetta, Lane, Stoumaras, Makhlouf and De Guindos) and the Fed (Mester, Bullard and Cook). US PPI has the potential to influence the inflation narrative at 13:30