Euro Outlook:
- The Euro remains structurally weak across the board, regardless of the recent rebound by EUR/USD rates.
- EUR/JPY rates have touched their lowest levels since mid-May, while EUR/GBP rates have broken the uptrend from the March and April lows.
- Per the IG Client Sentiment Index, EUR/JPY and EUR/GBP rates have bearish biases while EUR/USD rates have a mixed bias.
Dollar Masking Problems
The Euro has been sliding for the better part of the past two weeks, plagued by two main issues: the European Central Bank attempting to wrestle inflation pressures while preventing bond market fragmentation; and growing stagflation concerns as energy prices remain elevated and growth slows. With the July Fed meeting helping slam the brakes on the US Dollar rally, EUR/USD strength is more a function of greenback weakness than Euro strength.
A look around the EUR-crosses suggest that structural issues – both fundamental and technical – remain persistent after bullish opportunity slipped away late last month. Despite their rebound, EUR/USD rates failed to break above meaningful resistance. EUR/JPY rates have dropped to their lowest level in more than two months, while EUR/GBP rates have broken a multi-month uptrend.
EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 1)
EUR/USD rates failed to hurdle the July 21 high at 1.0278, and the reversal today is taking the shape of a bearish outside engulfing bar, signaling a short-term top. The pair has dropped back below its daily EMA envelope in the process, which is in neither bearish nor bullish sequential order. Daily MACD’s rebound below its signal line is abating, while daily Slow Stochastics’ return to overbought territory appears to be short-lived. A return back to last week’s low around the July Fed meeting at 1.0097 is not out of the question.
IG Client Sentiment Index: EUR/USD Rate Forecast (August 2, 2022) (Chart 2)
EUR/USD: Retail trader data shows 60.22% of traders are net-long with the ratio of traders long to short at 1.51 to 1. The number of traders net-long is 2.90% higher than yesterday and 11.46% lower from last week, while the number of traders net-short is 10.24% lower than yesterday and 12.72% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall.
Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD trading bias.
EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 3)
Last week it was noted that “a deeper setback to the area between the July low and the 38.2% Fibonacci retracement of the March low/May high range around 136.68/86 is still possible.” EUR/JPY rates plunged deeper than that, hitting 133.39 today, the lowest level since mid-May. However, today’s price action has produced a long lower wick on the daily candlestick, suggesting that short-term sellers are exhausted. Momentum remains significantly bearish regardless, suggesting that a ‘sell the rally’ mindset remains appropriate. EUR/JPY rates are still below its daily 5-, 8-, 13- and 21-EMAs, and the EMA envelope is aligned in bearish sequential order. Daily MACD is trending lower below its signal line, while daily Slow Stochastics are holding in oversold territory.
IG Client Sentiment Index: EUR/JPY Rate Forecast (August 2, 2022) (Chart 4)
EUR/JPY: Retail trader data shows 43.17% of traders are net-long with the ratio of traders short to long at 1.32 to 1. The number of traders net-long is 2.43% higher than yesterday and 25.87% higher from last week, while the number of traders net-short is 14.62% lower than yesterday and 25.17% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/JPY prices may continue to rise.
Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/JPY price trend may soon reverse lower despite the fact traders remain net-short.
EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (February 2021 to August 2022) (CHART 5)
In the prior update it was noted that “the area around the July low and the 61.8% Fibonacci retracement of the March low/June high range near 0.8401/03 is in focus.” EUR/GBP rates have cut through said support, and in the process have broken the uptrend from the March and April swing lows. With momentum still bearish – the pair is below its daily EMA envelope (which is in bearish sequential order), daily MACD is still declining below its signal line, and daily Slow Stochastics are in oversold territory – more losses towards the 76.4% Fibonacci retracement of the March low/June high range at 0.8325 are possible in the near-term.
IG Client Sentiment Index: EUR/GBP Rate Forecast (August 2, 2022) (Chart 6)
EUR/GBP: Retail trader data shows 69.54% of traders are net-long with the ratio of traders long to short at 2.28 to 1. The number of traders net-long is 4.45% higher than yesterday and 31.63% higher from last week, while the number of traders net-short is 0.44% higher than yesterday and 27.80% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/GBP prices may continue to fall.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/GBP-bearish contrarian trading bias.
--- Written by Christopher Vecchio, CFA, Senior Strategist
