Dutch central banker Klaas Knot yesterday became the first ECB council member to float the idea of a 50 basis point interest rate hike in the coming months if inflation pressures persist. Talking to Dutch TV, Knot said that the ECB should raise rates by 25bp in July and a larger increase should not be ruled if data shows inflation broadening and becoming more entrenched. While Mr. Knot is a known ECB monetary hawk, his comments sent the Euro spinning higher on Tuesday, accompanied by a rally in German bond yields. The monetary policy minutes from the last ECB meeting will be published tomorrow and may give the market some greater clarity on the future path of interest rates.

The US dollar (DXY) remains near its recent 20-year high (104.91) with fresh highs probable in the weeks ahead. While the market has priced in a large portion of the expected future path of US rates, the widening rate differential between the US dollar and a host of other currencies will keep the greenback in demand.

Chart via Investing.com

The daily EUR/USD chart shows the ongoing battle around the 1.0500 area with the recent break lower bought back quickly. A confirmed break lower will bring last Friday’s 1.0345 level back into play, and just five pips lower at 1.0340 the pair would be back to lows last seen in December 2002. For upwards progress to continue, the 1.06340 level needs to be taken out.
 

EUR/USD Daily Price Chart

(Click on image to enlarge)

Retail trader data show 67.56% of traders are net-long with the ratio of traders long to short at 2.08 to 1. The number of traders net-long is 10.04% lower than yesterday and 13.45% lower from last week, while the number of traders net-short is 20.97% higher than yesterday and 22.43% higher from last week.

We typically take a contrarian view of crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/USD price trend may soon reverse higher despite the fact traders remain net-long.

What is your view on the Euro – bullish or bearish?