The European Central Bank’s June rate decision did not bring forth any change in rates, although a new Staff Economic Projections was released, giving the Euro reason to rally.

Eurozone Inflation Expectations Keep Pushing Lower

The recent drop in oil prices has led to a sharp deterioration inflation expectations in recent weeks, a strong indication that growth concerns are indeed the cause of the turn lower. ECB President Mario Draghi’s preferred measure of inflation, the 5-year, 5-year inflation swap forwards, hit 1.256% today, sharply lower from where it was three months earlier at 1.501% -24.5-bps.

As a result, it’s not much of a surprise that the ECB’s Governing Council cut its 2019 and 2020 inflation forecasts as part of its Staff Economic Projections today. But even as inflation expectations have dipped, ECB President Draghi made clear that there still are high hurdles to clear in order for the ECB to come back to markets with another easing program.

Saying that “there’s no probability of deflation” and a “very low probability of a recession,” ECB President Draghi declared that he doesn’t “see any substantial worsening in outlook.” And while some members have suggested “restarting QE” as a policy response, monetary policy seems to have reached its limits in the near-term, with ECB President Draghi saying that “fiscal policy will have to come into consideration.”

June ECB Meeting Summary and Effect on Euro

Taking all of this information into account, it sounds like that while all policy tools are theoretically available in the worst case scenarios, ECB policymakers, particularly ECB President Draghi, don’t feel that these worst case scenarios will materialize over the coming months.

As such, even with forward guidance for low rates extended into at least the first half of 2020, the prospects of further rate cuts or another stimulus program beyond the TLTRO3 are exceptionally limited. This has created an opportunity for the Euro to trade higher in the near-term, as was the expected resulting price action around the June ECB meeting.

EURUSD Technical Analysis: Daily Price Chart April 2018 to June 2019 Chart 1

In our last EURUSD technical analysis review ahead of the June ECB meeting,we said that “the time for a breakout may be fast approaching…the EURUSD price forecast may be shifting to bullish as the downtrend from the January, February, April, and May 2019 highs appears ready to give way to a topside move.” Indeed, this past Monday, EURUSD prices cleared out the downtrend, raising the odds of a move to the topside.

It was also note that, “If a turn is developing, EURUSD prices will need to clear out more than just the 2019 downtrend. Ideally, bulls would see EURUSD price clear out 1.1265 – the May 1 around the Fed meeting and Fed Chair Powell’s press conference – establishing a new trend of higher highs in the process.” This observation still holds: despite significant gains this week, EURUSD prices have yet to close above 1.1265.

And so, while we now see greater potential for a EURUSD bottoming effort via the bullish falling wedge dating back to December 2018, EURUSD will need to see prices clear 1.1265 on a closing basis to cement the series of higher highs and therefore establish a new uptrend.

IG Client Sentiment Index: EURUSD Price Forecast June 6, 2019 Chart 2

EURUSD: Retail trader data shows 43.1% of traders are net-long with the ratio of traders short to long at 1.32 to 1. The percentage of traders net-long is now its lowest since March 10 when EURUSD traded near 1.12315. The number of traders net-long is 10.1% lower than yesterday and 41.8% lower from last week, while the number of traders net-short is 0.7% lower than yesterday and 54.8% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURUSD-bullish contrarian trading bias.