Euro Outlook:
- The major EUR-crosses tell different stories, as EUR/GBP and EUR/JPY rates are breaking out higher while EUR/USD rates are struggling near parity.
- Potential for broader weakness lingers, however, as the potential for another rapid rise in energy prices persists.
- According to the IG Client Sentiment Index, EUR/GBP and EUR/USD rates have a bullish bias, while EUR/JPY rates have a bearish bias.
At Relative Ease
The Euro is experiencing a bit of relief, if not against the US Dollar but against the majority of its other peers. European natural gas prices closed down more than -10% from their session highs, alleviating at least one short-term pressure point. And while the fundamental environment hasn’t improved all that meaningfully – a deep recession for the Eurozone appears imminent, if not already happening – the technical structures of the three major EUR-crosses suggest that the Euro may be able to rally further in the very near-term.
EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (September 2021 to September 2022) (CHART 1)
EUR/USD rates reversed sharply earlier this week and haven’t been able to recoup their losses, holding near parity for the past two days. Momentum remains fairly weak overall, with the pair below its daily 5-, 8-, 13-, and 21-EMA envelope, which remains aligned in bearish sequential order. Daily MACD is trending higher but still below its signal line, while daily Slow Stochastics are dropping below their median line. Given the tug-and-pull between the US Dollar and the broader EUR-crosses, it may be the case that EUR/USD rates remain magnetized to parity for the foreseeable future – as they have been for the better part of the past month.
IG Client Sentiment Index: EUR/USD Rate Forecast (September 15, 2022) (Chart 2)
EUR/USD: Retail trader data shows 63.92% of traders are net-long with the ratio of traders long to short at 1.77 to 1. The number of traders net-long is 1.80% lower than yesterday and 1.61% higher from last week, while the number of traders net-short is 5.01% higher than yesterday and 5.62% higher 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.
Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/USD price trend may soon reverse higher despite the fact traders remain net-long.
EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (September 2021 to September 2022) (CHART 3)
In the prior update it was noted that “EUR/JPY rates broke out of the descending parallel channel carved out since the beginning of June in recent days, and on the back of significant Japanese Yen weakness, the pair has quickly raced back to its yearly high…hurdling 144.28 would suggest that the next leg higher has begun, following on the bullish breakout of the multi-decade descending trendline from the July 2008 and December 2014 highs.”
Indeed, a fresh yearly high was recently established at 145.64, falling just short of the 61.8% Fibonacci extension of the March low/June high/August low move at 145.68, Momentum remains firm, with EUR/JPY rates above their daily 5-, 8-, 13-, and 21-EMAs, and the EMA envelope remains in bullish sequential order. Daily MACD is trending higher above its signal line, while daily Slow Stochastics are barely clinging onto overbought territory. That said, a bullish breakout appears in the process of playing out, suggesting that further upside is possible over the coming weeks.
IG Client Sentiment Index: EUR/JPY Rate Forecast (September 15, 2022) (Chart 4)
EUR/JPY: Retail trader data shows 24.70% of traders are net-long with the ratio of traders short to long at 3.05 to 1. The number of traders net-long is 22.56% higher than yesterday and 20.74% higher from last week, while the number of traders net-short is 1.39% lower than yesterday and 4.79% 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.
Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/JPY price trend may soon reverse lower despite the fact traders remain net-short.
EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (September 2021 to September 2022) (CHART 5)
In a sense, nothing has changed over the past week-plus, as “EUR/GBP rates have surged higher as the British Pound’s problems have overshadowed the Euro’s dour situation. The pair broke out of the three-month descending parallel channel at the end of August and has found follow-through thus far in September.” To this end, momentum has continued to strengthen, with EUR/GBP rates fully above their daily EMA envelope, which is in bullish sequential order. Daily MACD’s ascent above its signal line continues, and daily Slow Stochastics are holding in overbought territory. As noted previously, “a breach of 0.8721 would suggest that a more sustainable bullish move is getting started.”
IG Client Sentiment Index: EUR/GBP Rate Forecast (September 15, 2022) (Chart 6)
EUR/GBP: Retail trader data shows 27.93% of traders are net-long with the ratio of traders short to long at 2.58 to 1. The number of traders net-long is 11.81% lower than yesterday and unchanged from last week, while the number of traders net-short is 10.73% higher than yesterday and 19.42% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/GBP prices may continue to rise.
Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/GBP-bullish contrarian trading bias.
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--- Written by Christopher Vecchio, CFA, Senior Strategist
