Retail forex traders continue buying aggressively into US Dollar (ticker: USDOLLAR) declines against the Euro, but the EURUSD may have difficulty breaking above $1.30 given a dovish European Central Bank.
Retail crowds have been consistently net-short EURUSD since the pair crossed above $1.24 on August 20, and we have accordingly taken a contrarian position in favor of Euro strength. That has continued into this week as we see EUR short interest grew 15 percent in the past 7 days, and the clear question becomes whether the Euro can break above the $1.30 mark.
Yet an especially dovish European Central Bank threatens to sap EURUSD strength, and indeed a break higher is by no means guaranteed despite clearly one-sided retail sentiment.
We further see evidence that crowds are relenting on other US Dollar pairs; short interest on the GBPUSD actually fell 15 percent, while USDJPY longs tumbled 26% on the week.
We will need to see a more substantive shift in sentiment to call for a larger US Dollar reversal, but we thus far see early signs that the EURUSD rally may soon come to an end.
Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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