Euro Outlook:
- The Euro’s technical weakness is buffered by a fundamental catalyst: rapidly rising energy prices.
- Technical patterns among the three major EUR-crosses still leave open the door for more weakness in the near-term.
- Per the IG Client Sentiment Index, EUR/GBP rates have a bullish bias, EUR/JPY rates have a mixed bias, and EUR/USD rates have a bearish bias.
Problems Burst into the Open
In our prior update, we commented that “Eurozone energy inventories remain depressed ahead of the winter months…the pendulum [will swing] towards a greater focus on avoiding a significant economic downturn. The Euro’s problems have been kept at bay, but they continue to lurk, posing a risk for the single currency.” This week, those problems jumped into foreground.
The European energy crisis has gained more attention as benchmark natural gas prices have skyrocketed. Once again, on a day like today where natural gas prices are climbing rapidly, the Euro has seen its gains erode rapidly. The path ahead is fairly straight forward: until energy prices cool off, it’s likely that the technical picture remains open for further losses among the major EUR-crosses.
EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (August 2021 to August 2022) (CHART 1)
EUR/USD rates touched a fresh yearly low yesterday before the doji candle emerged today. Momentum has turned outright bearish, with the pair below its daily 5-, 8-, 13-, and 21-EMA envelope, which is aligned in bearish sequential order. Daily MACD is trending lower below its signal line, while daily Slow Stochastics are holding in oversold territory. A drop to 0.9892 would complete the measured move of the bearish breakout from the April through July range, but further losses can’t be dismissed given the fundamental backdrop just yet.
IG Client Sentiment Index: EUR/USD Rate Forecast (August 24, 2022) (Chart 2)
EUR/USD: Retail trader data shows 70.95% of traders are net-long with the ratio of traders long to short at 2.44 to 1. The number of traders net-long is 0.97% lower than yesterday and 28.42% higher from last week, while the number of traders net-short is 11.54% higher than yesterday and 16.02% 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 (August 2021 to August 2022) (CHART 3)
EUR/JPY rates continue to remain in a descending parallel channel carved out since the beginning of June, and the series of lower highs and lower lows has not yet been broken. Price action through August thus far has been choppy, depriving the pair of any significant momentum, however. Daily MACD is still trending while below its signal line but daily Slow Stochastics are dropping through their median line. The daily EMA envelope remains in bearish sequential order, with EUR/JPY rates fully below their daily EMA envelope. More rangebound conditions could prevail as the energy problems plaguing the Euro are not dissimilar from the ones plaguing the Japanese Yen.
IG Client Sentiment Index: EUR/JPY Rate Forecast (August 24, 2022) (Chart 4)
EUR/JPY: Retail trader data shows 32.11% of traders are net-long with the ratio of traders short to long at 2.11 to 1. The number of traders net-long is 4.12% higher than yesterday and 9.82% lower from last week, while the number of traders net-short is 3.89% higher than yesterday and 7.83% 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.
EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (February 2021 to August 2022) (CHART 5)
Like EUR/JPY rates, EUR/GBP rates have been trading in a descending parallel channel for nearly three months. A third attempt this month to break below the rising trendline from the March and April swing lows was rebuffed, although the pair has lingered around this trendline in recent days. Momentum remains weak, if not lacking a significant directional bias. EUR/GBP rates have traded through their daily EMA envelope, which is in bearish sequential order, however. Daily MACD’s ascent below its signal line continues, while daily Slow Stochastics are still falling after failing to reach overbought territory. Further consolidation may be in the cards as both the UK and the Eurozone share the same energy woes (offsetting the negative impact on both the EUR and the GBP).
IG Client Sentiment Index: EUR/GBP Rate Forecast (August 24, 2022) (Chart 6)
EUR/GBP: Retail trader data shows 53.34% of traders are net-long with the ratio of traders long to short at 1.14 to 1. The number of traders net-long is 10.54% higher than yesterday and 6.85% lower from last week, while the number of traders net-short is 1.83% lower than yesterday and 19.55% 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.
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--- Written by Christopher Vecchio, CFA, Senior Strategist
