The US dollar's move higher continues unabated and looks set to return to highs last seen in 2002 as the greenback becomes the safety play of choice. A fresh risk-off wave has swept over a range of markets this week, sending equity markets lower and USD pairs ever higher. US interest rate expectations continue to push higher, sending US Treasury yields to multi-year high levels. The interest-rate sensitive UST 2-year now yields 3.50%, a fresh 15-year high, and nearly 30 basis points more than the UST 10-year benchmark.

The US central bank has hiked rates at the last four Fed meetings this year and is set to continue this trend going into 2023. The Fed has raised rates by 225 basis points so far this year to a target rate of 2.25% - 2.50% and this rate is now seen peaking at 3.75% - 4.00% in mid-2023. In contrast, the European Central Bank (ECB) raised its three key lending rates by 50 basis points in July, the first rate hike in over a decade. With headline inflation in the Euro Area at a record high (9.1%), the ECB is now behind the curve hiking rates and recent commentary from various board members suggests that the central bank will look to front-load rate hikes in an attempt to dampen sky high price pressures. Energy prices in the Euro Area remain at highly inflated levels, while food prices continue to push higher.

With the ECB now looking to hike rates more aggressively, the Euro is starting to find some strength, albeit from a lowly level. After breaking back below parity, EUR/USD is now using 1.000 as short-term support and this may remain the case ahead of next week’s ECB monetary policy meeting. The daily chart still shows the pair in a downward trend with an unbroken series of lower highs and lower lows, while the spot price is under all three simple moving averages. Parity remains the first level of support, followed by 0.99006, while 1.0078 and 1.0090 will act as short-term resistance.
 

EUR/USD Daily Price Chart

(Click on image to enlarge)

Retail trader data show62.72% of traders are net-long with the ratio of traders long to short at 1.68 to 1. The number of traders net-long is 4.23% lower than yesterday and 15.22% lower than last week, while the number of traders net-short is 3.24% higher than yesterday and 19.14% higher than 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.

What is your view on the euro – bullish or bearish?

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