Euro Forecast: EUR/JPY, EUR/USD Remain Poised for Gains; EUR/GBP Eyes March 2020 Low
- EUR/JPY rates are holding above key technical thresholds that would suggest a longer-term bullish outlook is appropriate. EUR/USD rates have broken their intrayearly downtrend and are pointing higher.
- But each major EUR-cross has its own story to tell. EUR/GBP rates have lost ground for eight consecutive sessions, and nine of the past ten overall.
- According to the IG Client Sentiment Index, EUR/GBP has a mixed bias, EUR/JPY has a bearish bias, and EUR/USD has a bullish bias.
Euro Not in Driver’s Seat
The Euro does not have a compelling narrative driving its price action at present time, and as a result it has ceded the role of lead player to other major currencies’ themes. For EUR/JPY, it has meant following the prevailing move in risk assets, mainly stock markets. For EUR/GBP, it has been about differentials in vaccination rates and expected rates of growth. For EUR/USD, all attention has been on the Fed’s balance sheet and the Biden fiscal stimulus package.
The ‘rising yields’ narrative is non-existent when it comes to a point of support for the Euro.
GERMAN BUND, JGB, UK GILT, & US TREASURY 10-YEAR YIELDS: WEEKLY CHART (February 2014 to February 2021) (CHART 1)
In recent weeks, we’ve seen developed markets bond yields surge higher. But the gains seen off the 2021 lows by the German Bund 10-year yield (+58-bps) have been smaller compared to upward movements by the UK Gilt 10-year yield (+65-bps) and the US Treasury 10-year yield (+99-bps).
The lack of relative yield advantage offered by the Euro, and the deterioration in this profile as yield differentials have moved in favor of other major currencies, may be part of the reason why the Euro hasn’t been viewed as favorably as other currencies in recent weeks.
EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (February 2020 to February 2021) (CHART 2)
Even as US Treasury yields have outpaced various European sovereign debt (German Bunds, French OATs, Italian BTPs, among others), EUR/USD has been able to maintain its elevation. A reconstituted trendline from the June and November 2020 lows saw the early-February selloff come into said trendline as support. Recently, the pair has broken the intrayearly downtrend from the January and February swing highs.
This turn higher comes above a cluster of key technical supports: the 23.6% Fibonacci retracement of the 2019 low/2020 high range at 1.1945; the August and September 2020 highs at 1.1967 and 1.2011, respectively; and the 23.6% Fibonacci retracement of the 2017 low/2018 high range at 1.2033. Maintaining elevation above these levels has thus far warded off a significant bearish technical development; focus should be on bullish outcomes in the near-term.
IG Client Sentiment Index: EUR/USD Rate Forecast (February 23, 2021) (Chart 3)
EUR/USD: Retail trader data shows 41.32% of traders are net-long with the ratio of traders short to long at 1.42 to 1. The number of traders net-long is 0.42% lower than yesterday and 4.86% lower from last week, while the number of traders net-short is 1.70% higher than yesterday and 6.05% higher 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 (February 2020 to February 2021) (CHART 4)
In the last Euro forecast update it was noted that “EUR/JPY rates have broken out to the topside, trading above the rising trendline dating back to the 2012, 2016, and 2018 lows. In fact, by returning into this decade-plus symmetrical triangle, EUR/JPY rates have setup the technical posture to trade higher into 130.00 in the near-term, before attempting to break the downtrend from the 2008 (all-time high) and 2014 highs.”
The pair has proved itself resilient by maintaining its gains in the face of weakness in equity markets, leaving EUR/JPY well-positioned. Holding above the early-2021 high at 127.49 during this period of consolidation would also mean EUR/JPY was able to maintain its return above the ascending trendline from the 2012, 2016, and 2018 lows, a good omen for the future.
IG Client Sentiment Index: EUR/JPY Rate Forecast (February 23, 2021) (Chart 5)
EUR/JPY: Retail trader data shows 43.65% of traders are net-long with the ratio of traders short to long at 1.29 to 1. The number of traders net-long is 2.61% higher than yesterday and 22.77% higher from last week, while the number of traders net-short is 1.39% lower than yesterday and 15.07% 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 2020 to February 2021) (CHART 6)
When we last reviewed EUR/GBP rates, it was noted that “in bearish breakout territory indeed we are, with EUR/GBP rates moving below 0.8865. Likewise, EUR/GBP finds itself below the descending trendline from the 2007 and 2016 highs as well as the 2008 and 2016 highs. It’s worth noting that EUR/GBP rates have not recovered despite the indicators working off their stretched bearish readings, suggesting that there is still an inherent downward bias among traders.”
Nearly two weeks later, EUR/GBP rates have continued their losing ways, down eight days in a row and nine out of the last ten overall en route to fresh yearly lows. EUR/GBP rates remain below the daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD remains deep in bearish territory and daily Slow Stochastics are nestled in oversold territory. A test of the March 2020 low at 0.8593 seems likely in the days ahead.
IG Client Sentiment Index: EUR/GBP Rate Forecast (February 23, 2021) (Chart 7)
EUR/GBP: Retail trader data shows 61.29% of traders are net-long with the ratio of traders long to short at 1.58 to 1. The number of traders net-long is 4.36% lower than yesterday and 3.50% higher from last week, while the number of traders net-short is 1.25% higher than yesterday and 3.39% 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.
Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/GBP trading bias.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
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