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Euro Rally Pauses as Brexit Lingers - Outlook Remains Bullish for EUR/USD, EUR/JPY Rates

Euro Rally Pauses as Brexit Lingers - Outlook Remains Bullish for EUR/USD, EUR/JPY Rates

Christopher Vecchio, CFA, Senior Strategist
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Euro Forecast Overview:

  • The Euro rally has paused, but a small setback may not mean the bullish breakout attempts are finished.
  • Both EUR/JPY and EUR/USD rates are working on daily doji candles following Friday’s hammer candles.
  • Per the IG Client Sentiment Index, the Euro has a mostly bullish bias in the short-term.

Euro Takes a Breather; Brexit May be Holding Back Euro

The ambiguity around Brexit may be giving traders a reason to pause in their enthusiasm in the recent Euro breakout. True, EUR/GBP rates have started the week higher. But it’s notable that the Swiss Franc is the top performing major currency on the day – even EUR/CHF rates are lower.

The reach for safe havens in the currency world is a Europe-centric event. Look no further than Brexit. While a ‘no deal, hard Brexit’ hurts the UK more than the EU, the knock-on effects of a fractured trade deal may spill into international relations (e.g. security and military alliances) and perhaps coronavirus vaccine development and distribution coordination.

The net-result of the concern around Brexit is that Euro rally has paused, but a small setback may not mean the bullish breakout attempts are finished. Both EUR/JPY and EUR/USD rates are working on daily doji candles following Friday’s hammer candles, suggesting that a simple breather is taking place. The upcoming December ECB meeting, despite expectations for enhanced easing, seems like a non-concern at the moment.

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EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (December 2019 to December 2020) (CHART 1)

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EUR/USD rates are working on a doji candle following their bullish breakout above sideways range resistance in place since late-June. Overall, the outlook remains bullish following several weeks of EUR/USD rates maintaining their elevation above the downtrend from the 2008 and 2014 highs (from the all-time high). EUR/USD rates are holding their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is trending higher above its signal line, while Slow Stochastics are steadying in overbought territory.

Momentum remains in bulls’ favor as the prospect for a longer-term bottom come into focus. It still holds that final targets for a simple doubling of the broader range dating back to late-June would suggest gains through 1.2600 in the coming months.

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IG Client Sentiment Index: EUR/USD Rate Forecast (December 7, 2020) (Chart 2)

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EUR/USD: Retail trader data shows 27.95% of traders are net-long with the ratio of traders short to long at 2.58 to 1. The number of traders net-long is 8.93% higher than yesterday and 18.30% higher from last week, while the number of traders net-short is 8.36% higher than yesterday and 6.27% 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 December 2020) (CHART 3)

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EUR/JPY rates are still trading near their highest level since early-September, having stalled just below the 38.2% Fibonacci retracement of the 2016 low/2018 high range at 126.70. Additionally, EUR/JPY rates are meeting resistance in the form of the ascending trendline from the July 2012 and June 2016 lows, a trendline that has come into focus on numerous occasions over the past 12-months. A break through to fresh yearly highs above 127.08 would be a meaningful technical feat.

Momentum indicators remain bullish at present time. EUR/JPY rates are still above the daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is trending higherabove its signal line, while Slow Stochastics are holding in overbought condition. While some resistance is higher, the path of least resistance may be higher yet.

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IG Client Sentiment Index: EUR/JPY Rate Forecast (December 7, 2020) (Chart 4)

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EUR/JPY: Retail trader data shows 29.39% of traders are net-long with the ratio of traders short to long at 2.40 to 1. The number of traders net-long is 45.81% higher than yesterday and 9.21% higher from last week, while the number of traders net-short is 34.55% higher than yesterday and 77.62% higher 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.

Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/JPY trading bias.

Read more: Monthly Forex Seasonality - December 2020: End of Year Favors EUR, NZD Strength; USD Weakness

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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

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