EUR/USD Recovery Emerges With RSI On Track To Threaten Downward Trend

EUR/USD seems to have reversed course ahead of the November low (1.1603) as it initiates a series of higher highs and lows following the limited reaction to the US Non-Farm Payrolls (NFP) report, but the broader outlook remains geared towards the downside as the exchange rate trades back within the downward trending channel from earlier this year.

Image of DailyFX economic calendar for Euro Area

It remains to be seen if the account of the ECB’s March meeting will influence the near-term outlook for EUR/USD amid the recent slowdown in the pace of the pandemic emergency purchase program (PEPP), but the central bank appears to be on track to retain the current course for monetary policy as Chief Economist Philip Lane argues that “the increase in inflation during 2021 can be best interpreted as the unwinding of disinflationary forces that took hold in 2020 and does not constitute the basis for a sustained shift in inflation dynamics.”

In a recent blog post, Lane warns that “the projected medium-term inflation rate remains subdued amid still-weak demand and substantial slack in labor and product markets,” with the official going onto say that “inflation is projected to reach only 1.4 per cent by 2023, well below the Governing Council’s inflation aim.”

In turn, the account of the ECB meeting may strike a similar tone as the central bank relies on its non-standard tools to achieve its one and only mandate for price stability, and the Euro may face headwinds ahead of the next interest rate decision on April 22 as “the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year.”

Until then, the Euro stands at risk of facing headwinds as President Christine Lagarde and Co. retain a dovish forward guidance for monetary policy, and the decline from the January high (1.2350) may turn out to be a change in EUR/USD behavior rather than a correction in the broader trend as the depreciation in the exchange rate spurs a shift in retail sentiment, with traders flipping net-long for the fifth time in 2021.

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