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Euro Forecast: Bull Flags Take Shape in EUR/JPY, EUR/USD Rates

Euro Forecast: Bull Flags Take Shape in EUR/JPY, EUR/USD Rates

Christopher Vecchio, CFA, Senior Strategist
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Euro Forecast Overview:

  • The Euro has lagged some of its major peers as global risk appetite improves around Brexit and US fiscal stimulus headlines.
  • Both EUR/JPY and EUR/USD rates have retained their bullish posture, however, and bull flags that have been carved out thus far through December suggest more gains may be around the corner.
  • Per the IG Client Sentiment Index, the Euro has a bullish bias in the short-term.

Euro Holding its Own as Risk Appetite Improves

The Euro has not been a top performing major currency this week, trailing some of its majorpeers as global risk appetite improves around Brexit and US fiscal stimulus headlines. That’s not to the Euro’s discredit; traders are looking for higher yielding and growth-linked assets like the commodity currencies (EUR/AUD, EUR/CAD, EUR/NZD).

But two EUR-crosses have retained their bullish posture, and bull flags in both EUR/JPY and EUR/USD rates that have been carved out thus far through December suggest more gains may be around the corner. With the DXY Index, of which the Euro is the largest component at 57.6%, heading to fresh yearly and two-year lows, the prevailing macro environment is sinking safe havens like the US Dollar (as well as the Japanese Yen).

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

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EUR/USD rates are in the midst of carving out a bull flag following the bullish breakout above sideways range resistance in place since late-June. It remains the case 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.” The more near-term range carved out thus far in December between 1.2059 and 1.2178 (119-pips) suggests an immediate upside target of 1.2297.

Contextually, EUR/USD rates have been holding above the downtrend from the 2008 and 2014 highs (from the all-time high), and EUR/USD rates are back above their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is still trending higher above its signal line, while Slow Stochastics are holding in overbought territory. A bullish breakout may be around the corner.

IG Client Sentiment Index: EUR/USD Rate Forecast (December 15, 2020) (Chart 2)

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EUR/USD: Retail trader data shows 29.87% of traders are net-long with the ratio of traders short to long at 2.35 to 1. The number of traders net-long is 7.49% lower than yesterday and 9.87% lower from last week, while the number of traders net-short is 0.86% lower than yesterday and 5.19% 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.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/USD-bullish contrarian trading bias.

EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (December 2019 to December 2020) (CHART 3)

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EUR/JPY rates are like EUR/USD rates, insofar as the bull flag carved out thus far in December has yet to yield a breakout. The more near-term range carved out thus far in December between 125.79 and 126.74 (95-pips) suggests an immediate upside target of 127.69. However, momentum indicators are less bullish for EUR/JPY rates than EUR/USD rates.

EUR/JPY rates are now below their daily 5- and 8-EMAs, even though the daily 5-, 8-, 13-, and 21-EMA envelope is still in bullish sequential order. Daily MACD has narrowed and may turn lower above its signal line, while daily Slow Stochastics appear ready to pullback from overbought condition. Even if these indicators do not turn, the mere suggestion that they are not in bullish posture suggests that a bullish breakout in EUR/JPY rates may not be on the imminent horizon.

Amid the hold in the range, EUR/JPY rates are still trading near their early-September highs, capped just below the 38.2% Fibonacci retracement of the 2016 low/2018 high range at 126.70. Furthermore, EUR/JPY rates have found resistance at the ascending trendline from the July 2012 and June 2016 lows, a trendline that has been tested multiple times the past year.

Accordingly, it remains the case that “a bullish breakout to fresh yearly highs above 127.08 would be a material accomplishment,” one that would warrant a longer-term bullish outlook for EUR/JPY rates.

IG Client Sentiment Index: EUR/JPY Rate Forecast (December 15, 2020) (Chart 4)

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EUR/JPY: Retail trader data shows 36.79% of traders are net-long with the ratio of traders short to long at 1.72 to 1. The number of traders net-long is 26.99% higher than yesterday and 17.62% higher from last week, while the number of traders net-short is 4.83% lower than yesterday and 29.77% 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.

--- 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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