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Euro Talking Points:

- Technically, EURUSD is looking weak and further losses now seem likely.

- While the Euro-Zone economy remains buoyant, political concerns in Germany and Italy are unhelpful.

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EURUSD price chart puts bears in control

EURUSD has now fallen back for three of the past four sessions as the US Dollar has rallied, and the daily chart suggests that further losses could be on the way. Last Thursday, January 4, EURUSD hit its highest level since September 8 but, significantly, failed to breach the 1.2093 level touched on that day four months ago – the 2017 high for the currency pair.

EURUSD Price Chart Daily Timeframe (August 14, 2017 – January 9, 2018)

EUR Facing Downward Pressure Against USD

Chart by IG

Possible targets for EURUSD

Looking forward, the chart above suggests several possible downside targets for the pair. The first is at support from the two-month uptrend shown on the chart, currently at 1.1825. If that breaks, the next serious support level is the 1.1719 December 12 low, followed by the 1.1553 November 7 low.

On the upside, clearly a move back above the 2017 high at 1.2093 would negate the negative outlook and suggest further strength.

Political concerns also negative for EURUSD

Technical factors aside, the Euro faces at least three major political worries at present. First, Germany still has no government despite weeks of negotiations between Chancellor Angela Merkel and her political rivals. Second, Italy faces a general election on March 4, with the polls showing a hung Parliament and former premier Silvio Berlusconi well-placed to join a new government. Third, the Brexit negotiations will soon restart. While these have primarily affected GBPUSD so far, they could easily begin to influence EURUSD too.

Euro-Zone economy still buoyant

On the other side of the coin, the Euro-Zone economy remains buoyant. Figures released Monday showed confidence is higher than expected and retail sales data also topped forecasts. Today, Tuesday, German industrial production and trade data beat predictions too, while the Euro-Zone unemployment rate slipped back. This all suggests that the European Central Bank will reduce its monetary-stimulus program this year, although that is already priced-in to the current exchange rate.

IG Client Sentiment data point to further EURUSD weakness

Finally, IG Client Sentiment data are also pointing to a lower Euro. Retail trader data show 31.7% of traders are net-long, with the ratio of traders short to long at 2.16 to 1. The number of traders net-long is 28.2% higher than yesterday and 41.4% higher from last week, while the number of traders net-short is 1.0% lower than yesterday and 4.9% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment imply that EURUSD may weaken further despite the fact traders remain net-short.

--- Written by Martin Essex, Analyst and Editor

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