Merkel took an approach to the Euro’s value that we have not heard in a while. German Chancellor Angela Merkel described the EUR as “too weak,” which gave traders yet another reason to bid up the common currency. Outside of Merkel’s comments, there has not been a lot of volatility, but the trend remains in favor of EUR strength. A key risk worth watching into the June 8 ECB meeting where updated economic projections will be provided is a closing of the monetary policy divergence gap. The monetary policy divergence gap began widening in 2014 as EUR/USD made its well-publicized decent from 1.39 to 1.04 in less than a year. Since then, traders have been anticipating parity (1.00) in EUR/USD only to remain disappointed.

Now, it appears that the monetary policy divergence gap is tightening, which would be validated if the Fed pulls back their expectations, which can be seen through a bear flattening of the US yield curve while the ECB begins to shift their rhetoric toward tightening. The strength may be slow, but strong and a trend of this magnitude is likely not worth fighting. Another way the trend can be validated is through looking at 1-yr 25 delta risk reversals on EUR/USD, which helps to show the premium that is being paid by options traders to protect against EUR weakness. As of this week, the 1-year premium for puts (downside protection) is at the lowest level in 9-years. Put differently, not since 2009 have traders been this at ease or unwilling to pay for downside EUR protection.

Another story that seemed alarming, but did not cause traders to sell aggressively was a report that the U.K. may walk away from Brexit negotiations should the bill surpass EU100 billion. Naturally, the EU is set to progress with negotiations by taking a rather demanding stance as is expected in any divorce where both parties work to get what they believe to be rightfully theirs. A look at sterling will likely have traders watching Cable above 1.3000, where it has had a difficult time finding new buyers, while also looking to see if EUR/GBP can break higher. A further closing of the gap in polling by the Labour Party ahead of the June 8 election could cause sterling weakness as it may indicate a likely unstable negotiating stance for the UK. Should Oil strength continue, traders may also want to keep an eye on GBP/CAD & GBP/NOK downside.

Speaking of Crude Oil, markets are in the shadows of an encore as OPEC meets on Thursday to discuss how best to extend the production cuts. While markets are currently pricing in an optimistic 18-month extension of production cuts through March 2018, there remains a possibility for deeper cuts to be a cause for surprise that keeps Crude pushing higher. Over the last five trading days, Crude Oil is up nearly 4%, and support near $48/bbl looks to be an appropriate focal point such that traders will have a hard time me finding Bearish momentum above this level.

Closing Bell’s Top Chart: May 22, 2017, what happens if EUR/USD trades > 1.1450?

Tomorrow's Main Event: EUR Markit Eurozone Composite PMI (MAY P)

Oil - US Crude: As of May 22, retail trader data shows 56.4% of traders are net-long with the ratio of traders long to short at 1.3 to 1. In fact, traders have remained net-long since Apr 19 when Oil - US Crude traded near 5312.5; theprice has moved 3.7% lower since then. The percentage of traders net-long is now its lowest since Apr 17 when it traded near 5301.8. The number of traders net-long is 5.5% lower than yesterday and 32.2% lower from last week, while the number of traders net-short is 3.5% higher than yesterday and 20.9% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Oil - US Crude 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 Oil - US Crude price trend may soon reverse higher despite the fact traders remain net-long.