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Euro Remains at Risk as EUR/USD Implied Volatility Surges and Retail Traders Go Long

Euro Remains at Risk as EUR/USD Implied Volatility Surges and Retail Traders Go Long

Daniel Dubrovsky, Strategist

Euro, EUR/USD, Ukraine, Implied Volatility, IGCS – Technical Outlook

  • Euro weakens to start the week, remains in familiar range against US Dollar
  • Bearish Rectangle chart formation continues to mature, watch for breakout
  • EUR/USD one-week implied volatility on the rise as retail traders go long

Euro Technical Analysis

Despite Russia’s attack on Ukraine boosting market volatility, the Euro continues to trade within a familiar range against the US Dollar. In fact, EUR/USD could be forming a Bearish Rectangle chart formation. The boundaries of the rectangle seem to be between 1.107 and 1.1495. A breakout to the downside may open the door to resuming the downtrend that preceded the chart formation.

It is also possible that the lower boundary of the rectangle continues to hold as key support, prolonging the consolidative state in the Euro. This is as the 100-day Simple Moving Average (SMA) continues to hold a downward slope, offering a resistance point that could reinstate the dominant downward focus in the single currency.

Breaking to the downside exposes the 61.8% and 78.6% Fibonacci extensions at 1.1048 and 1.10927 respectively. Beyond that sits lows from April 2020, forming a support range between 1.0727 and 1.0793. In the event of a breakout above the rectangle, that could shift the technical outlook increasingly bullish. Such an outcome exposes the 1.1664 – 1.1692 inflection zone before August highs kick in as resistance.

Given unfolding events in Ukraine, traders ought to treat key breakouts in the Euro with a grain of salt. Over the weekend, the Euro gapped significantly lower before trimming losses by the end of Monday’s trading session. According to Bloomberg, EUR/USD one-week implied volatility sits at 10.025, the most since November 2020. This is something traders ought to take into account as the situation matures.

EUR/USD Daily Chart

Euro Remains at Risk as EUR/USD Implied Volatility Surges and Retail Traders Go Long

Chart Created in TradingView

Euro Sentiment Outlook - Bearish

Taking a look at IG Client Sentiment data, about 62% of retail traders are net-long EUR/USD. IGCS tends to function as a contrarian indicator. Since the majority of the crowd is biased to the upside, this hints at further downside potential. This is as upside exposure increased by 24.23% and 8.95% compared to yesterday and last week respectively. The combination of current and recent changes in sentiment thus produces a stronger contrarian trading bias.

Euro Remains at Risk as EUR/USD Implied Volatility Surges and Retail Traders Go Long

*IGCS Chart and Positioning Data Used From February 28th Rpoert

--- Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

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

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