Euro Technical Analysis: Consistent Narrative Forming for EUR/GBP, EUR/JPY, EUR/USD

Euro Outlook:

• Euro strength is emerging on a more consistent basis across the major EUR-crosses as the Russian invasion of Ukraine appears to be in its final stages.
• A ceasefire would allow the European Central Bank to move more aggressively on interest rates to tame inflation pressures, which would help close the rate differential gap with other major central banks.
• Per the IG Client Sentiment Index, each of EUR/GBP, EUR/JPY, and EUR/USD rates have a mixed bias.

Narrative Taking Shape…

The Euro has been trading stronger in recent days as speculations swirls that the Russian invasion of Ukraine is close to ending. As talks progress towards a ceasefire, the proverbial toothpaste is being back in the tube: no more commodity supply chain disruptions; no more funding stresses in financial markets; no more uncertainty about the economic fallout.

Against this backdrop of dissolving concerns, traders have begun to position themselves as if the European Central Bank will not have significant uncertainty to deal with as it moves to withdraw stimulus and tighten monetary policy later this year. Indeed, should the Russo-Ukrainian war end, it stands to reason that the ECB will act more quickly to tame inflation pressures sooner than 4Q’22, where market pricing stood prior to this week. Rate differentials, which had favored a weaker Euro relative to the British Pound and the US Dollar, have begun to swing back in the Euro’s favor.

EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to March 2022) (CHART 1)

EUR/USD rates have moved above 1.1120, former support in a sideways range that was carved out between January and February. In doing so, a meaningful bottom may have been formed after the pair briefly fell to the ascending trendline from the 2000 and 2017 lows. Resistance is already achieved, with EUR/USD rates trading higher into the descending trendline from the May 2021, September 2021, and January 2022 swing highs. A ‘buy the dip’ mentality may be appropriate in EUR/USD rates so long as the pair stays above 1.1120.

IG Client Sentiment Index: EUR/USD Rate Forecast (March 30, 2022) (Chart 2)

EUR/USD: Retail trader data shows 55.18% of traders are net-long with the ratio of traders long to short at 1.23 to 1. The number of traders net-long is 9.01% lower than yesterday and 15.82% lower from last week, while the number of traders net-short is 10.49% higher than yesterday and 2.22% higher 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.

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

EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to March 2022) (CHART 3)

EUR/JPY rates tagged the January 2018 high at 137.51 before the bull run paused in recent days. It stands to reason that the observation made last week, that “the multi-month bull flag that formed after breaking above the descending trendline from the July 2008 and December 2014 highs has finally yielded a topside move that points to further strength in the weeks and months ahead,” is valid. It likewise remains the possible that “a return back to the flag breakout level near 132.80 isn’t out of the question, though; buying the dips is the preferred strategy henceforth.”

IG Client Sentiment Index: EUR/JPY Rate Forecast (March 30, 2022) (Chart 4)

EUR/JPY: Retail trader data shows 26.35% of traders are net-long with the ratio of traders short to long at 2.79 to 1. The number of traders net-long is 14.29% lower than yesterday and 4.00% higher from last week, while the number of traders net-short is 7.39% higher than yesterday and 11.38% 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.

Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/JPY trading bias.

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

EUR/GBP rates may be carving out an inverse head and shoulders pattern (left shoulder at the early-February low, head at the March low, right shoulder at last week’s low), with a neckline against the February high – which was breached today. Bullish momentum is gathering pace, with the pair above its daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is trending higher through its signal line, while daily Slow Stochastics are about to enter overbought territory. The measured move in the inverse head and shoulders pattern (0.8476-0.8203, 273-pips) calls for an upside target of 0.8749.

IG Client Sentiment Index: EUR/GBP Rate Forecast (March 30, 2022) (Chart 6)

EUR/GBP: Retail trader data shows 51.89% of traders are net-long with the ratio of traders long to short at 1.08 to 1. The number of traders net-long is 1.00% lower than yesterday and 20.87% lower from last week, while the number of traders net-short is 23.83% higher than yesterday and 22.19% 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.

— Written by Christopher Vecchio, CFA, Senior Strategist