Euro Outlook:
- Strength in the US Dollar (via the DXY Index) has translated into fresh monthly lows for EUR/USD rates.
- Meanwhile, both EUR/GBP and EUR/JPY rates have lost significant momentum, pointing to fresh monthly lows as well.
- Per the IG Client Sentiment Index, the Euro’s bias is shifting from neutral to bearish.
Euro on its Back Foot
A weak US 30-year bond auction (tailed by 2.4-bps) following the red-hot June US inflation report has sparked a late-day rally in the US Dollar (via the DXY Index) – much at the Euro’s expense. While the divide between Federal Reserve and European Central Bank policy hasn’t been pronounced, schisms are starting to appear that suggest divergence disfavoring the Euro.
With fresh monthly lows transpiring in EUR/USD rates, the entire EUR-complex has been seemingly dragged down; both EUR/GBP and EUR/JPY rates have dropped to fresh monthly lows as well. The technical structure for the three major EUR-crosses is bearish as the calendar moves into the ides of July.
EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to July 2021) (CHART 1)
EUR/USD rates dropped below last week’s low of 1.1782, setting a fresh monthly low in the process. Momentum is turning more bearish anew after a few days of reprieve. The pair is extending its drop below its daily 5-, 8-, 13-, and 21-EMA envelope, which remains in in bearish sequential order. Daily MACD is falling again while in bearish territory,and daily Slow Stochastics are turning lower after failing to return above their median line. As noted at the start of July, “having broken the June low, it’s possible that a deeper setback towards the March low at 1.1704 may be around the corner.”
IG Client Sentiment Index: EUR/USD Rate Forecast (July 13, 2021) (Chart 2)
EUR/USD: Retail trader data shows 57.87% of traders are net-long with the ratio of traders long to short at 1.37 to 1. The number of traders net-long is 6.86% higher than yesterday and 5.15% lower from last week, while the number of traders net-short is 11.54% lower than yesterday and 3.86% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall.
Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD trading bias.
EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (April 2020 to July 2021) (CHART 3)
In the prior update, it was noted that “it soon may be the case that the pair makes another attempt at the 61.8% Fibonacci retracement of the 2014 high/2015 low range at 134.29; the technical structure remains bullish.” This was wrong, as the bullish symmetrical triangle failed soon after, losing the uptrend from the May 2020, November 2020, and June 2021 swing lows. EUR/JPY rates are below their daily EMA envelope, which is in bearish sequential order. Daily MACD is falling while below its signal line, and while daily Slow Stochastics are not in oversold territory, they are still below their median line. Although technically not a high, an evening star candle cluster may be forming, a hint at more weakness to come; support comes into play below 129.00.
IG Client Sentiment Index: EUR/JPY Rate Forecast (July 13, 2021) (Chart 4)
EUR/JPY: Retail trader data shows 49.70% of traders are net-long with the ratio of traders short to long at 1.01 to 1. The number of traders net-long is 1.20% lower than yesterday and 8.25% higher from last week, while the number of traders net-short is 1.22% higher than yesterday and 11.94% 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.
Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/JPY trading bias.
EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (February 2020 to July 2021) (CHART 5)
EUR/GBP rates have been extremely choppy in recent weeks, with little thrust in either direction. We’ve been open to opportunities on both sides: in mid-June, it was noted that “losing this area (0.8561/69) would suggest that the next leg lower is imminent”; at the start of July, it was noted that “the pair never found much acceleration below this support region, and now it appears a turn higher is transpiring.” Choppy markets have shredded the July bullish scenario, returning focus to the bearish perspective garnered in June.
EUR/GBP rates remain in a descending channel since the start of May, and we now be finding some follow through to the downside below the June low at 0.8530 and the 76.4% Fibonacci retracement of the 2020 low/high range at 0.8569.
EUR/GBP rates are below their daily EMA envelope, which has shifted into bearish sequential order. Daily MACD is turning lower while below its signal line, while daily Slow Stochastics are entering oversold territory. These may be early indications that a return to the April low at 0.8472 is beginning to take shape.
IG Client Sentiment Index: EUR/GBP Rate Forecast (July 13, 2021) (Chart 6)
EUR/GBP: Retail trader data shows 74.91% of traders are net-long with the ratio of traders long to short at 2.99 to 1. The number of traders net-long is 10.95% higher than yesterday and 11.70% higher from last week, while the number of traders net-short is 2.48% lower than yesterday and 8.94% 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.
Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/GBP-bearish contrarian trading bias.
--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
