- Eurozone fundamentals worsen while USD benefits from EM risk-off rotation
- No end in sight for EUR/USD downtrend, although light expected trading over Thanksgiving may provide a slight reprieve
- IG Client Sentiment ‘mixed’ despite a sizeable 72% of traders net-long
Eurozone Fundamentals Deteriorate
The picture is looking increasingly worse for the Euro this week as German neighbors, Austria begins a 20 day lockdown. After assessing the situation, German health officials were unable to guarantee that Europe’s largest economy will avoid similar measures in an attempt to stem the recent spike in new Covid-19 infections.
New Covid-19 Cases (Germany)
Euro weakness has been the theme for most of the year but it is perhaps against the US dollar that this will continue to be felt the most. ECB President Christine Lagarde has maintained, at great length, a supportive and accommodative tone despite inflation reaching 4.2% (YoY) in October.
In contrast, The US is coming off better-than-expected retail sales data and red hot inflation, adding pressure to the tapering timeline and rate hike expectations. Just last week, Fed Vice-Chair Richard Clarida said that the tapering timeline warrants discussion at December’s Fed meeting which continues to support the recent strength of the dollar. Last week’s rate cut by the Turkish Central Bank kickstarted a move away from EM currencies (USD/ZAR, USD/TRY and USD/MXN) towards traditional safe haven plays (USD, CHF, JPY).
In essence: Covid resurgence, EU growth concerns and the risk-off currency rotation plays into the dollars hands at the expense of the Euro.
Key Technical Levels and Chart Analysis (EUR/USD)
As mentioned before, the broader theme of Euro weakness, coupled with dollar strength, can be seen on the weekly EUR/USD chart as the pair has traded lower for most of 2021. After last week’s decline, the pair now trades below the 1.1400 key level which has been the source of multiple inflections in the past (particularly 2015-2016 but also 2020). Trading below this level therefore, leaves the door open for further declines.
EUR/USD Weekly Chart
Chart prepared by Richard Snow, IG
The daily chart helps to frame more recent price action as there has been an attempt to push up towards the area of confluence (purple rectangle) at the intersection of the 1.1400 level and trendline support. Support, after Friday’s strong rejection of higher prices, comes in at 1.1168.
At the same time, the aggressive selling over the last two weeks may result in exhaustion whereby the pair trades towards resistance at 1.1350. Such a move may prompt Euro bears once more as they seek to ‘sell the rally’.
EUR/USD Daily Chart
Chart prepared by Richard Snow, IG
Client Sentiment ‘Mixed’ Despite Heavy Long Positioning
The sentiment overlay on the EUR/USD chart is very telling but only tells half of the story. More than 72% of IG EUR/USD traders are net-long despite the deep downtrend but recent changes in positioning muddies the waters.
The number of traders net-long is 7.62% higher than yesterday and 0.43% higher from last week, while the number of traders net-short is 15.97% higher than yesterday and 4.65% 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.
Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD reading.
US Heavy Data Prints Await
Positive manufacturing data is expected out of the US this week with the headline items being the PCE data and FOMC meeting minutes from the November 3rd meeting when tapering was agreed to. We end off the week with ECB Monetary Policy Meeting Accounts
For all market-moving data releases and events see the DailyFX Economic Calendar
— Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX