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Euro Technical Analysis: More Downside as Russia Wages War – Setups for EUR/GBP, EUR/JPY, EUR/USD

Euro Technical Analysis: More Downside as Russia Wages War – Setups for EUR/GBP, EUR/JPY, EUR/USD

Christopher Vecchio, CFA, Senior Strategist
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Euro Outlook:

  • The Euro continues to struggle in the wake of the sanctions against Russia, as funding market stresses stoke demand for US Dollars.
  • EUR/JPY rates are dropping towards their multi-decade descending trendline from all-time highs; EUR/USD rates have just broken out of a range; EUR/GBP rates are closing in on their lowest levels since the Brexit vote in 2016.
  • Per the IG Client Sentiment Index, EUR/GBP and EUR/USD rates have a bearish bias, while EUR/JPY rates are on neutral ground.

Funding Stresses High, ECB Retreating

The Russian invasion of Ukraine, and subsequent sanctions by the European Union and United States, has proved costly to the Euro on two fronts. First, market expectations for a more hawkish European Central Bank have evaporated over the past week, widening the chasm between the ECB and central banks like the Bank of England and Federal Reserve. Second, liquidity conditions have deteriorated (as measured by EUR/USD basis swaps), underscoring the greatest demand for US Dollars by financial institutions since the early days of the COVID-19 pandemic.

With the largest ground war in Europe since World War 2 under way, the economic fallout has only just begun. While a more widespread conflict drawing in European Union countries and NATO forces has thus far been avoided, traders are treating the Euro as if the worst is yet to come. Both the fundamental and technical narratives suggest more downside is likely in the near-term for EUR/GBP, EUR/JPY, and EUR/USD rates.

EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to March 2022) (CHART 1)

Euro Technical Analysis: More Downside as Russia Wages War – Setups for EUR/GBP, EUR/JPY, EUR/USD

EUR/USD rates have established fresh yearly lows, falling below 1.1050 for the first time since May 2020, at the time this report was written. The sideways range carved out since the start of January has yielded a bearish breakout, with a measured move pointing towards losses continuing below 1.0800; the double top is in play.

Bearish momentum is strong, with EUR/USD rates below their daily 5-, 8-, 13-, and 21-EMA envelope, which is in full bearish sequential order. Daily MACD continues to dive below its signal line, while daily Slow Stochastics have moved into oversold territory. The pair remains on track to fulfil a move below 1.1000 soon, consistent with the expectations outlined in the Top 1Q’22 Trading Opportunities outlook.

IG Client Sentiment Index: EUR/USD Rate Forecast (March 3, 2022) (Chart 2)

Euro Technical Analysis: More Downside as Russia Wages War – Setups for EUR/GBP, EUR/JPY, EUR/USD

EUR/USD: Retail trader data shows 67.04% of traders are net-long with the ratio of traders long to short at 2.03 to 1. The number of traders net-long is 0.55% higher than yesterday and 17.02% higher from last week, while the number of traders net-short is 2.51% lower than yesterday and 14.33% 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.

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

EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to March 2022) (CHART 3)

Euro Technical Analysis: More Downside as Russia Wages War – Setups for EUR/GBP, EUR/JPY, EUR/USD

After tagging topside resistance in mid-February, it has effectively been a straight line down for EUR/JPY rates within the multi-month bull flag that began to form in April 2021. But the bull flag formation is looking weaker by the day, with the pair nearing a test of support below 127.00 in the near future. A drop below 127.65/90 over the coming week would prove to be a materially negative development, constituting a return below the descending trendline from the July 2008 (all-time high) and December 2014 highs. Similar to EUR/USD rates, EUR/JPY rates are below their daily 5-, 8-, 13-, and 21-EMA envelope, which is in full bearish sequential order. Daily MACD is dropping further below its signal line, while daily Slow Stochastics have sunk into oversold territory.

IG Client Sentiment Index: EUR/JPY Rate Forecast (March 3, 2022) (Chart 4)

Euro Technical Analysis: More Downside as Russia Wages War – Setups for EUR/GBP, EUR/JPY, EUR/USD

EUR/JPY: Retail trader data shows 47.05% of traders are net-long with the ratio of traders short to long at 1.13 to 1. The number of traders net-long is 15.95% lower than yesterday and 15.23% higher from last week, while the number of traders net-short is 29.69% higher than yesterday and 10.67% 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 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 (March 2021 to March 2022) (CHART 5)

Euro Technical Analysis: More Downside as Russia Wages War – Setups for EUR/GBP, EUR/JPY, EUR/USD

EUR/GBP rates have set a fresh yearly low over the past 24-hours, briefly dropping below their pandemic low of 0.8282. It’s far too soon to say that the bleeding has stopped, given the aggressive bearish momentum profile: the pair is below its daily EMA envelope, which is in full bearish sequential order; daily MACD is falling while below its signal line; and daily Slow Stochastics have just entered oversold territory. Not much support is close by, considering the fact that EUR/GBP rates are on the verge of dropping to levels last seen on the night of the Brexit vote in June 2016.

IG Client Sentiment Index: EUR/GBP Rate Forecast (March 3, 2022) (Chart 6)

Euro Technical Analysis: More Downside as Russia Wages War – Setups for EUR/GBP, EUR/JPY, EUR/USD

EUR/GBP: Retail trader data shows 80.39% of traders are net-long with the ratio of traders long to short at 4.10 to 1. The number of traders net-long is 8.07% higher than yesterday and 9.01% higher from last week, while the number of traders net-short is 1.08% lower than yesterday and 12.44% 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

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

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