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Euro Forecast: Trading Through Political Headwinds - Setups in EUR/JPY, EUR/USD Rates

Euro Forecast: Trading Through Political Headwinds - Setups in EUR/JPY, EUR/USD Rates

Christopher Vecchio, CFA, Senior Strategist
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Euro Forecast Overview:

  • The Euro is proving resilient despite a resurgent US Dollar, and it now may be finding the footing needed before attempting another turn higher.
  • Rising political risks in Italy and the Netherlands has been shrugged off by the Euro, as has some dovish jawboning by the European Central Bank.
  • Per the IG Client Sentiment Index, the Euro still has a bullish bias in the short-term.

Euro Dealing with Political Risks…?

The Euro has been plagued by poor vaccination rates, trailing both the post-Brexit UK and the post-Trump US, and now dual political crises in Italy and the Netherlands have emerged. And yet…the Euro does not seemed burdened. European bond yields are not shooting higher, perhaps because the European Central Bank has issued some dovish jawboning at its recent policy meeting. But even then, the dovish remarks about the Euro have gone unnoticed; the Euro is not trading lower.

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

Euro Forecast: Trading Through Political Headwinds - Setups in EUR/JPY, EUR/USD Rates

In the prior update it was noted that “the rising trendline from the May and November 2020 lows comes into focus near 1.1950 through next week, in the midst of a confluence of significant technical levels: 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. In aggregate, this major support zone is carved out between 1.1945 and 1.2033. Failure below here would be a significant bearish technical development.”

But the significant bearish technical development never transpired. Instead, bulls held support, and EUR/USD rates have turned higher through the intramonth downtrend. EUR/USD rates are now above their daily 5-, 8-, 13-, and 21-EMA envelope, which is almost in bullish sequential order. Daily MACD’s descent above its signal line continues to fade, while daily Slow Stochastics’ rise towards their median line has gathered pace.

The Euro is proving resilient despite a resurgent US Dollar, and EUR/USD rates now may be finding the footing needed before attempting another turn higher.

IG Client Sentiment Index: EUR/USD Rate Forecast (January 26, 2021) (Chart 2)

Euro Forecast: Trading Through Political Headwinds - Setups in EUR/JPY, EUR/USD Rates

EUR/USD: Retail trader data shows 38.52% of traders are net-long with the ratio of traders short to long at 1.60 to 1. The number of traders net-long is 7.62% lower than yesterday and 12.80% lower from last week, while the number of traders net-short is 5.03% higher than yesterday and 6.43% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD 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/USD-bullish contrarian trading bias.

EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (January 2020 to January 2021) (CHART 3)

Euro Forecast: Trading Through Political Headwinds - Setups in EUR/JPY, EUR/USD Rates

EUR/JPY rates are back on the up-and-up, thanks in part to the rising tide of global equity markets (which EUR/JPY tends to track more closely than EUR/USD). EUR/JPY remains below the rising trendline from the October and November 2020 swing lows at the end of the week, but has rebounded ahead of the rising trendline from the May and November 2020 lows, as well as the 38.2% Fibonacci retracement of the 2014 high/2016 low range at 124.71.

Momentum is turning bullish for EUR/JPY rates, slowly but surely. Daily Slow Stochastics are trending higher through their median line, while daily MACD’s descent above its signal line has faded (just like EUR/USD). EUR/JPY rates are above their daily 5-, 8-, 13-, and 21-EMA envelope, which is aligning in bullish sequential order. A return to the rising trendline from the October and November 2020 lows calls for a move towards 127.00 over the coming sessions (before running into the September 2020 high near 127.08)

IG Client Sentiment Index: EUR/JPY Rate Forecast (January 26, 2021) (Chart 4)

Euro Forecast: Trading Through Political Headwinds - Setups in EUR/JPY, EUR/USD Rates

EUR/JPY: Retail trader data shows 40.35% of traders are net-long with the ratio of traders short to long at 1.48 to 1. The number of traders net-long is 15.12% higher than yesterday and 15.12% higher from last week, while the number of traders net-short is 17.48% lower than yesterday and 5.79% 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. The combination of current sentiment and recent changes gives us a further mixed EUR/JPY trading bias.

--- 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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