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Euro Technical Analysis: Signs of a Near-Term Top –  Setups for EUR/GBP, EUR/JPY, EUR/USD

Euro Technical Analysis: Signs of a Near-Term Top – Setups for EUR/GBP, EUR/JPY, EUR/USD

Christopher Vecchio, CFA, Senior Strategist
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Euro Outlook:

  • Last week, German inflation data and the European Central Bank rate decision sparked a rally in the EUR-crosses – a rally that may be finished.
  • EUR/USD may be looking at a double top and EUR/GBP is working on a bearish evening star candlestick pattern. If a bullish opportunity exists, it may be in EUR/JPY rates.
  • Per the IG Client Sentiment Index, each of the major EUR-crosses have a different bias.
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Rally May Be Mostly Finished

Last week, German inflation data and the European Central Bank rate decision sparked a rally in the EUR-crosses. Rates markets – using €STR, which replaced EONIA – are now pricing in 50-bps of rate hikes by the ECB through the end of 2022 and over 100-bps of rate hikes through the end of 2023. A lot of tightening has been priced in quickly, but such a scenario seems farfetched: one, European bond yield spreads relative to the German Bund are widening quickly; and two, the ECB still believes that inflation pressures will recede over the course of this year.

In the event that the market is already too aggressive on the expected path of ECB rate hikes, then it stands to reason that the Euro is trading at a premium relative to some of the other major currencies. A review of the technical setups in EUR/GBP and EUR/USD rates suggests that the February rally may be finished, while in a world of rising interest rates and higher oil prices, EUR/JPY rates may be the outlier in retaining their bullish potential.

EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (February 2021 to February 2022) (CHART 1)

EUR/USD rates have once again traded above the descending trendline from the May and September 2021 swing highs, but have run into familiar resistance that capped gains earlier this year: the 50% Fibonacci retracement of the 2017 low/2018 high range; and the 50% Fibonacci retracement of the 2020 low/2021 high range. It appears that a double top has formed just shy of 1.1500. A move below 1.1385 – former resistance in the triangle that was forming between November 2021 and January 2022 – would be a strong indication that the double top was the valid interpretation of price action.

IG Client Sentiment Index: EUR/USD Rate Forecast (February 8, 2022) (Chart 2)

EUR/USD: Retail trader data shows 39.06% of traders are net-long with the ratio of traders short to long at 1.56 to 1. The number of traders net-long is 3.79% higher than yesterday and 27.79% lower from last week, while the number of traders net-short is 0.44% lower than yesterday and 51.84% 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.

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/USD trading bias.

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EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (February 2021 to February 2022) (CHART 3)

Among the EUR-crosses, EUR/JPY rates retain their bullish technical formation. Resistance has been found at the 23.6% Fibonacci retracement of the 2018 high/2020 low range at 132.05. But bullish momentum has increased meaningfully, with the pair above its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order, while daily MACD is trending higher through its signal line and daily Slow Stochastics are holding in overbought territory. As the broader, multi-month bull flag remains in place dating back to April 2021, it may be the case that EUR/JPY rates continue to trade higher into 133.00 before a potential top is found.

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IG Client Sentiment Index: EUR/JPY Rate Forecast (February 8, 2022) (Chart 4)

EUR/JPY: Retail trader data shows 24.93% of traders are net-long with the ratio of traders short to long at 3.01 to 1. The number of traders net-long is 13.92% higher than yesterday and 36.84% lower from last week, while the number of traders net-short is 11.52% higher than yesterday and 76.55% 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.

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EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (February 2021 to February 2022) (CHART 5)

EUR/GBP rates set a fresh yearly low last week before reversing dramatically, posting a massive bullish key reversal on the day of both the ECB and Bank of England rate decisions. But there are signs that the rally has peaked, insofar as a bearish evening star candlestick pattern has emerged over the past three days. Considering that the BOE is already on the rate hike path while the ECB’s is more theoretical in nature, the realized of an actual divergence in BOE and ECB rates should continue to favor more downside in the pair. A close below 0.8420 today would offer the clearest evidence that EUR/GBP rates have topped in the near-term.

IG Client Sentiment Index: EUR/GBP Rate Forecast (February 8, 2022) (Chart 6)

EUR/GBP: Retail trader data shows 52.12% 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 5.14% higher than yesterday and 38.01% lower from last week, while the number of traders net-short is 12.75% higher than yesterday and 96.94% higher 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.

Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/GBP price trend may soon reverse higher despite the fact traders remain net-long.

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

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

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