Until the drag of speculative longs has been sufficiently corrected EUR/USD will struggle to rally, but once a better balance is achieved the pair may get a significant boost to a shift in the ECB's tone as the potential end of QE looms in September.
EUR/USD traders have been reluctant sellers with only a modest reduction in longs occurring during EUR/USD's drop from 1.2414 on April 17 to 1.1838 May 8.
As a result, levels perceived as strong resistance around the 200-DMA at 1.2021 are attracting some remaining longs to sell to maximise profits.
A neutrally positioned market may take weeks to evolve but with short-term technicals bearish, a reduction in net longs is certain, but then traders short on technicals may get sucker-punched by interest rates.
That's because years of negative or zero rates have led to complacency in EZ bond markets, unlike U.S. markets which are now adjusted to rate rises.
The softer euro could turn the ECB back to the strong hawkish view sounded in December, and the bond market reaction may be acute.
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