EUR Talking Points
- Recent US dollar strength has weighed on EUR/USD but the uptrend remains in place for now.
- A German coalition government should underpin the single currency.
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EUR/USD Likely to Push Higher
The recent downturn in the most popular FX trading pair, EUR/USD, may prove short-lived if closely followed momentum and sentiment indicators prove to be correct. In addition with a German coalition government now likely – news sources are confirming this as we go to print – the EUR will take heart from a settled political backdrop in the single-zone’s largest member.
After making a new three-year high of 1.25360 on January 25 this year, EUR/USD has given back nearly two cents as US dollar picked up from its recent lows on better-than-expected US data, boosting expectations that the latest jobs and wage data may boost inflation in the coming months. A subsequent rally in US Treasury yields underpinned the greenback but the latest pull-back may yet run out of steam as yields drift lower again.
The chart below shows that while the pair have made three ‘lower highs’ in a row, the pair remain above all three EMAs – a positive sign, while the stochastic indicator - a measure of momentum - is touching oversold levels and may provide another boost to EUR/USD. A breakdown however, could see the pair retrace back to the 1.2200 level, before strength re-appears.
DailyFX chief currency strategist John Kicklighter took an in-depth look at EUR/USD in his latest Forex Market Report and posited that Speculating on (ECB) Rate Hikes 12 to 18 months Ahead is Extremely Indulgent
EUR/USD Price Chart Daily Timeframe (August 15, 2017 – February 7, 2018)
EUR/USD Sentiment Data Show Clients Remain Net Short
IG Client Sentiment show 31.2% of traders are net-long with the ratio of traders short to long at 2.21 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.05687; price has moved 16.9% higher since then. The number of traders net-long is 11.8% higher than yesterday and 12.1% lower from last week, while the number of traders net-short is 11.3% higher than yesterday and 7.5% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD 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 EURUSD trading bias.
A German Coalition Government Would Underpin the Euro
As we write, it seems likely that the discussions between the German Chancellor Angela Merkel’s Christian Alliance and the Social Democrats have produced a new coalition government after months of wrangling. Germany has been without a government since the country held a general election on September 24, 2017. In the coming hours/days it will be interesting to see the make-up of any new coalition and which party gets the all-important finance ministry role.
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--- Written by Nick Cawley, Analyst
To contact Nick, email him at nicholas.cawley@ig.com
Follow Nick on Twitter @nickcawley1
