Euro Forecast: Bearish Momentum Accelerating in EUR/JPY, EUR/USD
Euro Forecast Overview:
- Weak economic data and a fresh wave of lockdowns has investors reconsidering the Euro at the start of November.
- EUR/USD rates appear to have lost their sideways range and have fallen back into a longstanding downtrend, while EUR/JPY rates are still retracing after breaking the pandemic trendline.
- Per the IG Client Sentiment Index, the Euro has a bearish bias.
Euro’s Turn in the Barrel
The Euro has struggled in recent days amid concerning COVID-19 outbreak data suggesting that parts of Europe are experiencing the worst rates of infection seen anywhere in the world. With France, Italy, and Germany – the Eurozone’s three largest economies – entering lockdowns once more, speculation has risen that sluggish economic data will be coming through the end of the year. Against the backdrop of US Dollar strength on diminished fiscal stimulus hopes thus fueling a rise in US real yields, the Euro finds itself on its backfoot at the start of November.
Eurozone Data Continues to Suffer as COVID-19 Outbreaks Surge
Considering recent COVID-19 outbreaks surging in Europe, the disappointing economic data performance is concerning. While the Citi Economic Surprise Index for the Eurozone, a gauge of economic data momentum, currently sits at 101.6 today (a sizeable jump from 3.8 on October 28, but due to older data releases rolling off the time horizon creating a ‘base effect’), it is still less than half of its peak over the summer (212.4 on August 11).
EUROPEAN CENTRAL BANK INTEREST RATE EXPECTATIONS (November 2, 2020) (CHART 1)
Alongside the concerning coronavirus pandemic developments, expectations for the European Central Bank to act again have started to rise. According to Eurozone overnight index swaps, there is a 25% chance of a 10-bps interest rate cut by the end of 2020. But interest rate cut odds have been pulled forward in recent months. In mid-August, OIS pricing favored June 2021 with 54% odds for the next rate move. Now, as November trading gets under way, March 2021 is favored with an implied probability of 59%.
EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (November 2019 to November 2020) (CHART 1)
EUR/USD rates have experienced meaningful technical damage in recent days. EUR/USD rates have fallen below the rising trendline from the May and September swing lows, effectively the pandemic trendline. Likewise, the uptrend from mid-June and September swing lows has been broken.
Amid these developments, the sideways range carved out since late-July has been broken to the downside, and the pair has returned back into the downtrend going back to the February 2018 high. EUR/USD rates are moving below their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD has declined below its signal line into bearish territory, and Slow Stochastics have shifted into oversold condition. Bearish momentum is gaining pace.
IG Client Sentiment Index: EUR/USD Rate Forecast (November 2, 2020) (Chart 2)
EUR/USD: Retail trader data shows 49.25% of traders are net-long with the ratio of traders short to long at 1.03 to 1. The number of traders net-long is 19.37% higher than yesterday and 59.65% higher from last week, while the number of traders net-short is 9.50% higher than yesterday and 34.04% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD 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/USD price trend may soon reverse lower despite the fact traders remain net-short.
EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (November 2019 to November 2020) (CHART 3)
The EUR/JPY rate daily chart has turned bearish, insofar as the rising trendline from the May and September swing lows has been broken and bearish momentum has accelerated aggressively. EUR/JPY rates are below the daily 5-, 8-, 13-, and 21-EMA envelope and the differential (% of EUR/JPY rate) between the 5-EMA and the spot close is increasing. Daily MACD is trending lower below its signal line and Slow Stochastics are nestled in oversold condition. More losses appear to be on the horizon, and the area near the July swing low around 120.25 appears to be the closest nearby support region.
IG Client Sentiment Index: EUR/JPY Rate Forecast (November 2, 2020) (Chart 4)
EUR/JPY: Retail trader data shows 55.30% of traders are net-long with the ratio of traders long to short at 1.24 to 1. The number of traders net-long is 29.59% higher than yesterday and 50.59% higher from last week, while the number of traders net-short is 14.93% higher than yesterday and 20.82% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/JPY 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/JPY-bearish contrarian trading bias.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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