Euro Forecast: Positives Few and Far Between – Setups for EUR/GBP, EUR/JPY, EUR/USD

Euro Outlook:

• None of the major EUR-crosses suggest that the lows are in just yet, from a technical perspective.
• EUR/JPY rates have broken their multi-month uptrend, EUR/GBP rates have experienced a failed bullish breakout, and EUR/USD rates just touched parity.
• Per the IG Client Sentiment Index, EUR/JPY and EUR/USD rates have bearish biases while EUR/GBP rates have a mixed bias.

ECB Falls Further Behind

The European Central Bank’s efforts to keep a lid on bond yields may be working so far – at least if you look at what’s happening with Greek, Italian, Portuguese, and Spanish yields – but the currency market is telling a different story. Significant questions remain over how the ECB will be able to successfully navigate raising rates to combat inflation while preventing fragmentation of Eurozone bond markets, leading to a dramatic underperformance by the Euro in recent weeks.

The questionable fundamental picture in the near-term has helped catalyze a meaningful reversal in the major EUR-crosses. EUR/JPY rates have broken their multi-month uptrend. EUR/GBP rates have experienced a failed bullish breakout, and EUR/USD rates just touched parity. There are no technical reasons to suggest that the worst is over yet.

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

At the end of June, it was noted that “range trading remains the preference until either support around 1.0349/97 breaks to the downside or resistance around 1.0757/1.0806 is breached to the upside.” The downside break transpired last week, setting up a measured move towards 0.9892. After briefly touching parity today, EUR/USD rates have rebounded, but momentum remains bearish. EUR/USD rates are below their daily 5-, 8-, 13-, and 21-EMAs, and the EMA envelope is in bearish sequential order. Daily MACD is trending lower below its signal line, while daily Slow Stochastics are holding in oversold territory. It’s likely that ‘the low’ hasn’t been reached yet.

IG Client Sentiment Index: EUR/USD Rate Forecast (July 13, 2022) (Chart 2)

EUR/USD: Retail trader data shows 75.11% of traders are net-long with the ratio of traders long to short at 3.02 to 1. The number of traders net-long is 3.21% lower than yesterday and 13.80% higher from last week, while the number of traders net-short is 7.00% lower than yesterday and 1.00% 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)

While it was previously suggested that EUR/JPY rates were “continuing to hold within the confines of an ascending triangle carved out dating back to the March low,” that is no longer the case. In fact, the uptrend from the March and May swing lows has been broken, setting up a more significant bearish reversal. Momentum is now outright bearish, with the pair below its daily 5-, 8-, 13- and 21-EMAs, and the EMA envelope is in bearish sequential order. Daily MACD is crossing below its signal line, while daily Slow Stochastics are holding in overbought territory. A deeper setback to the 50% Fibonacci retracement of the March low/May high range at 134.33 is still possible.

IG Client Sentiment Index: EUR/JPY Rate Forecast (July 13, 2022) (Chart 4)

EUR/JPY: Retail trader data shows 38.21% of traders are net-long with the ratio of traders short to long at 1.62 to 1. The number of traders net-long is 2.22% higher than yesterday and 7.48% higher from last week, while the number of traders net-short is 6.77% lower than yesterday and 3.88% 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. Recent changes in sentiment warn that the current EUR/JPY price trend may soon reverse lower despite the fact traders remain net-short.

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

EUR/GBP rates have reversed higher from the 61.8% Fibonacci retracement of the March low/June high range near 0.8401, but more losses may ultimately transpire. Like the other major EUR-crosses, the pair remains below its daily 5-, 8-, 13-, and 21-EMAs, and the EMA envelope is in bearish sequential order. Daily MACD is crossing below its signal line, while daily Slow Stochastics remain in oversold territory. Further losses towards the rising trendline from the March and April swing lows closer to 0.8370 are possible in the near-term.

IG Client Sentiment Index: EUR/GBP Rate Forecast (July 13, 2022) (Chart 6)

EUR/GBP: Retail trader data shows 63.38% of traders are net-long with the ratio of traders long to short at 1.73 to 1. The number of traders net-long is 4.41% lower than yesterday and 8.14% higher from last week, while the number of traders net-short is 1.28% higher than yesterday and 20.40% lower 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.

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/GBP trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist