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Weekly Technical Euro Forecast: Basically a Falling Knife

Weekly Technical Euro Forecast: Basically a Falling Knife

Christopher Vecchio, CFA, Senior Strategist
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Weekly Technical Euro Forecast: Basically a Falling Knife

Technical Forecast for the Euro: Bearish

  • The Euro has been cut down to size in recent days, and technical studies among various EUR-crosses suggest that the weakness may continue.
  • Net-long Euro positioning is now at its lowest level since July 2020 – and the reporting period ended prior to the selloff on Thursday and Friday.
  • The IG Client Sentiment Index suggests that EUR/GBP and EUR/USD are still vulnerable to more downside, while EUR/JPY has a neutral bias.

Euro Rates Week in Review

It was a rough week for the Euro. Losing ground against five of the other seven major currencies, three EUR-crosses posted losses in excess of -1% (EUR/CAD -1.98%; EUR/USD -1.34%; EUR/AUD -1.08%). Meanwhile, the two EUR-crosses that managed to finish in positive did not gain more than +1% (EUR/CHF -0.91%; EUR/JPY -0.29%).

Trading at the end of the week took on more of a risk-on tone in the wake of the February US jobs report, and if the reflation trade continues to gather pace (higher US yields, higher US equities, higher US Dollar), the Euro is a prime culprit for more losses as the Euroarea maintains one of the more pitiful COVID-19 vaccination rates across the developed world – a sign that it may lag other economies in regaining its potential post-pandemic.

No matter where you look, the Euro is under a great deal of technical pressure: versus the commodity currencies (EUR/AUD, EUR/CAD, EUR/NZD) or even against the Nordic currencies (EUR/NOK, EUR/SEK). In this week’s technical review, we’ll examine the damage wrought upon the three major EUR-crosses: EUR/GBP, EUR/JPY, and EUR/USD.

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Euro Economic Calendar Week Ahead

Before turning to the charts, a quick look at the Euroarea economic calendar for the week ahead, which always has the potential to induce event-risk volatility.

- On Tuesday, March 9, January German balance of trade, January Italian industrial production, and the final 4Q’20 Euroarea GDP growth readings will be released.

- On Wednesday, March 10, January French industrial production is due.

- On Thursday, March 11, the European Central Bank rate decision will be announced, and ECB President Christine Lagarde will hold a press conference.

- On Friday, March 12, final February German inflation rates and January Euroarea industrial production figures will be released.

For full Euroarea economic data forecasts, view the DailyFX economic calendar.

EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to March 2021) (CHART 1)

Weekly Technical Euro Forecast: Basically a Falling Knife

In the most recent EUR/USD forecast update it was noted that “the rising trendline from the May and November 2020 lows is being pressured once more, which comes near: the 23.6% Fibonacci retracement of the 2019 low/2020 high range at 1.1945; the August and September 2020 highs at 1.1967 and 1.2011, respectively; and the 23.6% Fibonacci retracement of the 2017 low/2018 high range at 1.2033. It thus once again is the case that “failure below here would be a significant bearish technical development.’”

Bearish momentum continues to accelerate, with the pair below its daily 5-, 8-, 13-, and 21-EMA in bearish sequential order. Daily MACD is extending its drop below its signal line, while daily Slow Stochastics have plunged into oversold territory. Having closed below the rising trendline from the May and November 2020 lows, as well as the 23.6% Fibonacci retracement of the 2019 low/2020 high range at 1.1945, the August and September 2020 highs at 1.1967 and 1.2011, respectively, and the 23.6% Fibonacci retracement of the 2017 low/2018 high range at 1.2033, EUR/USD heads into next week with a bearish bias.

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IG Client Sentiment Index: EUR/USD Rate Forecast (March 5, 2021) (Chart 2)

Weekly Technical Euro Forecast: Basically a Falling Knife

EUR/USD: Retail trader data shows 53.93% of traders are net-long with the ratio of traders long to short at 1.17 to 1. The number of traders net-long is 7.27% higher than yesterday and 25.27% higher from last week, while the number of traders net-short is 10.76% lower than yesterday and 10.26% 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 2021) (CHART 3)

Weekly Technical Euro Forecast: Basically a Falling Knife

It’s been previously noted that “the symmetrical triangle that’s formed at the start of 2021, in context of the preceding bullish move, would suggest that EUR/JPY rates have a bias for a bullish breakout. EUR/JPY rates have broken out to the topside, trading above the rising trendline dating back to the 2012, 2016, and 2018 lows. In fact, by returning into this decade-plus symmetrical triangle, EUR/JPY rates have setup the technical posture to trade higher into 130.00 in the near-term, before attempting to break the downtrend from the 2008 (all-time high) and 2014 highs.”

This analysis remains valid, but EUR/JPY may prove directionless in the coming sessions as significant overhead resistance looms while most other EUR-crosses experience more significant downside.

IG Client Sentiment Index: EUR/JPY Rate Forecast (March 5, 2021) (Chart 4)

Weekly Technical Euro Forecast: Basically a Falling Knife

EUR/JPY: Retail trader data shows 46.27% of traders are net-long with the ratio of traders short to long at 1.16 to 1. The number of traders net-long is 15.33% lower than yesterday and 30.26% higher from last week, while the number of traders net-short is 2.43% higher than yesterday and 2.79% 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.

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EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (February 2020 to March 2021) (CHART 5)

Weekly Technical Euro Forecast: Basically a Falling Knife

In the most recent EUR/GBP forecast update it was noted that “as EUR/GBP has carved out a sideways channel against the yearly low, prices have not recovered meaningfully – even if the indicators have lost their extreme readings…In context of the symmetrical triangle bearish breakout, any consolidation see in EUR/GBP rates would be seen as a bear flag with support at 0.8539 and resistance at 0.8731.”

EUR/GBP remains within this consolidation, but has begun to move towards support with our usual slate of momentum indicators following suit (and perhaps hinting that a bearish breakout attempt is around the corner). EUR/GBP rates are below the daily 5-, 8-, 13-, and 21-EMA envelope, which remains in bearish sequential order. Daily MACD is starting to turn lower while below its signal line, while daily Slow Stochastics have turned lower below their median line. Bear flag with support at 0.8539 is in focus.

IG Client Sentiment Index: EUR/GBP Rate Forecast (March 5, 2021) (Chart 6)

Weekly Technical Euro Forecast: Basically a Falling Knife

EUR/GBP: Retail trader data shows 65.14% of traders are net-long with the ratio of traders long to short at 1.87 to 1. The number of traders net-long is 5.26% higher than yesterday and 34.79% higher from last week, while the number of traders net-short is 10.81% lower than yesterday and 6.38% 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.

CFTC COT Euro Futures Positioning (September 2020 to March 2021) (Chart 7)

Weekly Technical Euro Forecast: Basically a Falling Knife

Finally, looking at positioning, according to the CFTC’s COT for the week ended March 2, speculators decreased their net-long Euro positions to 125,988 contracts, down from 138,365 contracts held in the week prior. Net-long Euro positioning is near its lowest level in eight month, since the week ended July 21, when speculators held 125,047 net-short contracts.

Read more: FX Week Ahead - Top 5 Events: US Inflation; BOC & ECB Rate Decisions; UK GDP; Canada Jobs

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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

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