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Forex Analysis: Has the Euro Topped?

Forex Analysis: Has the Euro Topped?

David Rodriguez, Head of Product

The Euro has fallen nearly 200 pips from last week’s highs, but has it set a short-term top? We take a look at key pros and cons to weigh the risks of a larger reversal.

Pro arguments for an important Euro/US Dollar top:

US Dollar (ticker: USDOLLAR) rallies as forex fundamentals turn in favor of Greenback

The Euro is likely to remain heavy on poor FX fundamental data

Technical forex forecasts favor Euro weakness if we remain below Monday’s high

Cons against an important Euro/US Dollar top

US Dollar consolidates on FOMC, dovish Fed could force Greenback sell-off

Low forex volatility favors selling US Dollar strength

Bullish commodity trends suggest US Dollar could slide

The recent turn in the EURUSD ultimately leaves short-term momentum to the downside, but it may take a larger swing for us to turn completely bearish. Why?

As we wrote last week, the fact that forex trading crowds remain heavily short EURUSD gives us an overall bullish bias. Indeed, the majority of traders first turned short Euro from the $1.25 mark. Where do they stand now?

Forex Sentiment Indicator Shows Majority of Retail Traders Bearish EURUSD

forex_analysis_has_the_euro_topped_body_Picture_1.png, Forex Analysis: Has the Euro Topped?

If crowds are short EURUSD, we most often want to be long. Yet it’s important to note that total short interest has fallen over 20 percent since last week while long interest is 10 percent higher.

Early signs point to a turn, and indeed one of our Sentiment-based forex trading strategies recently sold EURUSD from $1.2965. Past performance is not indicative of future results, but it’s worth noting that the system in question has caught important turns in the EURUSD through recent months.

Could this be another instance of an important turnaround? We’ll keep a close eye on near-term price action and retail FX trader sentiment.

--- Written by David Rodriguez, Quantitative Strategist for

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Meet the DailyFX team in Las Vegas at the annual FXCM Traders Expo, November 2-4, 2012 at the Rio All Suite Hotel & Casino. For additional information regarding the schedule, workshops and accommodations, visit the FXCM Trading Expo website.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.