Euro Outlook:
- A plethora of negative developments in recent days has been plaguing the Euro, including rising COVID-19 infections and news that energy supplies will remain constrained.
- ECB President Lagarde noted that the ECB still sees“inflation moderating in the next year, but it will take longer to decline than originally expected,”a suggestion that any upside price pressures won’t be met by a response by the central bank.
- Per the IG Client Sentiment Index, the majority of EUR-crosses have a bearish bias.
One Thing After Another
It’s been a rough November for the Euro, and there’s no reason to think that the situation will improve anytime soon. Rising COVID-19 infection rates and energy supply concerns – Germany announced today it was halting approval of the Russian Nord Stream 2 pipeline – are clouding the near-term economic outlook, leading to murmurs of stagflation in the Eurozone.
But that’s not provoking the European Central Bank into a change in stance. ECB President Christine Lagarde has flatly stated that rates markets are wrong to anticipate any rate hikes in 2022, noting that “at a time when purchasing power is already being squeezed by higher energy and fuel bills, an undue tightening of financing conditions is not desirable, and would represent an unwarranted headwind for the recovery.”
Surging Eurozone inflation is dragging down European real yields, which is undercutting the Euro’s appeal – even against other lower yielding currencies like the Japanese Yen.
The ECB’s recalcitrance towards higher inflation pressures – now running more than double the medium-term target of +2% – is creating a widening chasm relative to policy expectations among other major central banks. The Federal Reserve has already begun to taper asset purchases and markets are dragging forward rate hike expectations into the first half of 2022. Meanwhile, the Bank of England appears ready to raise rates shortly.
EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to November 2021) (CHART 1)
EUR/USD rates have crashed lower in recent weeks, dropping to their lowest level since July 2020. Having already lost the 50% Fibonacci retracements of the 2017 low/2018 high and 2020 low/2021 high range, the pair now finds itself back below the descending trendline from the 2008 and 2014 highs, a warning signal that suggests the breakout above the multi-year trendline has failed; this sets EUR/USD rates on a more considerable downward trajectory head into 2022.
In the near-term, EUR/USD rates are experiencing sharp bearish momentum, with the pair below its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD is continuing its drop below its signal line, while daily Slow Stochastics are nestled in oversold territory. The outlook moving forward is to sell rallies.
IG Client Sentiment Index: EUR/USD Rate Forecast (November 16, 2021) (Chart 2)
EUR/USD: Retail trader data shows 69.12% of traders are net-long with the ratio of traders long to short at 2.24 to 1. The number of traders net-long is 0.97% lower than yesterday and 27.84% higher from last week, while the number of traders net-short is 9.21% higher than yesterday and 23.27% 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 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/USD trading bias.
EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (April 2020 to November 2021) (CHART 3)
EUR/JPY rates appear to be in trouble in the near-term, having fallen back into the sideways range that formed between mid-July and mid-October. As if often the case, returning into a consolidation after a breakout attempt typically calls for a move to the other side of the consolidation, in this case, a drop back to the summer lows below 128.00.
Like in EUR/USD, EUR/JPY is experiencing acute bearish momentum in the near-term. The pair is below its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. Daily MACD has just started to drop through its signal line, while daily Slow Stochastics are holding in oversold territory. Selling rallies is the modus operandi in the near-term.
IG Client Sentiment Index: EUR/JPY Rate Forecast (November 16, 2021) (Chart 4)
EUR/JPY: Retail trader data shows 52.23% of traders are net-long with the ratio of traders long to short at 1.09 to 1. The number of traders net-long is 7.59% higher than yesterday and 17.65% higher from last week, while the number of traders net-short is 4.89% lower than yesterday and 16.62% 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.
EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (November 2020 to November 2021) (CHART 5)
The British Pound’s weakness at the start of November was a red herring, insofar as the monthly candle is now a shooting star, suggesting considerable selling pressure; the past three days have wiped out all of the gains accumulated by EUR/GBP rates earlier this month. EUR/GBP rates are seeing bearish momentum accelerate, although momentum indicators aren’t as negative as for EUR/JPY and EUR/USD rates. The pair is below its daily EMA envelope, which hasn’t aligned in full bearish sequential order yet. But daily MACD is crossing below its signal line, and daily Slow Stochastics are on the verge of breaking below their median line. A drop back to the yearly low at 0.8403 (and beyond) is anticipated soon.
IG Client Sentiment Index: EUR/GBP Rate Forecast (November 16, 2021) (Chart 6)
EUR/GBP: Retail trader data shows 67.05% of traders are net-long with the ratio of traders long to short at 2.04 to 1. The number of traders net-long is 14.23% higher than yesterday and 21.68% higher from last week, while the number of traders net-short is 27.92% lower than yesterday and 31.57% 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 Strategist
