Euro Forecast: Bullish Opportunity Slips Away – Setups for EUR/GBP, EUR/JPY, EUR/USD

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Euro Outlook:

  • Energy concerns trump all else for the Euro, as news that Russia is limiting gas exports has growth concerns on the rise.
  • EUR/JPY rates failed to retake the uptrend from the March and May swing lows, EUR/GBP rates have fallen back to their June low, and EUR/USD rates failed to make a decisive break above their daily 21-EMA (one-month moving average).
  • Per the IG Client Sentiment Index, EUR/JPY and EUR/GBP rates have bullish biases while EUR/USD rates have a bearish bias.

Winter is Coming

The Euro is dealing with a litany of issues right now, leaving the European Central Bank with the most difficult of jobs among the major central banks. Bond market fragmentation remains a risk, even though peripheral bond yields have not yet widened out relative to their core counterparts. Rate hikes have arrived, although a weak growth trajectory begs the question of how much the ECB can actually accomplish.

But the rejuvenated problem du jour is Europe’s energy supply problem. Russia has announced that it is reducing gas supplies through its Nord Stream 1 pipeline to only 20% capacity, stoking fears that Eurozone growth will slow further, and perhaps more importantly, that energy inventories won’t be stockpiled in a significant enough manner before winter.

These competing factors, coupled with positioning adjustments ahead of the July Fed meeting tomorrow, have seen the Euro lose its grip on perhaps its most bullish technical setup in recent months. EUR/JPY rates failed to retake the uptrend from the March and May swing lows, EUR/GBP rates have fallen back to their June low, and EUR/USD rates failed to make a decisive break above their daily 21-EMA (one-month moving average).

EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (July 2021 to July 2022) (CHART 1)

EUR/USD rates have been rejected at their daily 21-EMA (one-month moving average) after flirting with the level several times in recent days. The pair has not posted consecutive closes above the daily 21-EMA since June 7 and 8. EUR/USD rates are back below their daily 5-, 8-, 13-, and 21-EMAs, and the EMA envelope is in bearish sequential order. Daily MACD’s rebound below its signal line is failing, while daily Slow Stochastics never reached overbought territory. The turn lower, ahead of the July Fed meeting, puts increased focus on technical levels to the downside, in particular the yearly low carved out at 0.9952.

IG Client Sentiment Index: EUR/USD Rate Forecast (July 26, 2022) (Chart 2)

EUR/USD: Retail trader data shows 65.84% of traders are net-long with the ratio of traders long to short at 1.93 to 1. The number of traders net-long is 15.12% higher than yesterday and 12.58% higher from last week, while the number of traders net-short is 19.22% lower than yesterday and 11.66% 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 (July 2021 to July 2022) (CHART 3)

EUR/JPY rates were trying to make a turn higher through the uptrend from the March and May swing lows, but that has failed. The pair is now below its daily 5-, 8-, 13- and 21-EMAs, and the EMA envelope is aligning in bearish sequential order. Daily MACD is crossing below its signal line, while daily Slow Stochastics are on the verge of crossing below their median line. A deeper setback to the area between the July low and the 38.2% Fibonacci retracement of the March low/May high range around 136.68/86 is still possible.

IG Client Sentiment Index: EUR/JPY Rate Forecast (July 26, 2022) (Chart 4)

EUR/JPY: Retail trader data shows 31.11% of traders are net-long with the ratio of traders short to long at 2.21 to 1. The number of traders net-long is 17.28% lower than yesterday and 25.28% lower from last week, while the number of traders net-short is 8.80% higher than yesterday and 10.42% 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.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/JPY-bullish contrarian trading bias.

EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (July 2021 to July 2022) (CHART 5)

In the prior update it was noted that “further losses towards the rising trendline from the March and April swing lows closer to 0.8370 are possible in the near-term.” EUR/GBP rates made progress in this direction, losing ground sharply in recent days. The area around the July low and the 61.8% Fibonacci retracement of the March low/June high range near 0.8401/03 is in focus first, however.

IG Client Sentiment Index: EUR/GBP Rate Forecast (July 26, 2022) (Chart 6)

EUR/GBP: Retail trader data shows 55.60% of traders are net-long with the ratio of traders long to short at 1.25 to 1. The number of traders net-long is 4.81% higher than yesterday and 14.96% higher from last week, while the number of traders net-short is 6.10% higher than yesterday and 21.79% higher 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.

Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/GBP price trend may soon reverse higher despite the fact traders remain net-long.

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— Written by Christopher Vecchio, CFA, Senior Strategist

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