Is The Current Bullish Momentum In EUR/USD Sustainable?

The euro has been boosted in recent times by rising ECB interest rate expectations as rates markets now anticipate over 100 basis points of tightening into year-end, starting with the first hike in July. The timing of the ‘lift-off’, in July, has been well communicated by doves and hawks within the ECB’s governing council and so it just remains a question of by how much.

However, due to the well-telegraphed preference to hike in July, markets have already priced in this information, leaving little room for further currency appreciation resulting from rate hike expectations. Additional risks in the form of the prolonged issue around the Northern Ireland Protocol (Post-Brexit arrangement concerning the movement of goods from the UK to the EU) and challenges faced by EU member states around the Russian oil embargo remain.

On the US front, it is way too soon to assume the dollar will remain softer for longer. Yes, we have seen a reduction in Fed hike odds from pricing in 200 bps into year-end, to just under 180. However, persistent inflation keeps the Fed’s path very much on track while geopolitical uncertainty (Russia/Ukraine/China) drags on. Jerome Powell mentioned in an interview with WSJ that the Fed isn’t looking at nuanced detail in the data to suggest inflation is cooling and that a drastic decline in the level of prices is required to alter the Fed’s current rate of tightening.

From a positioning perspective, the dollar has come off quite a bit, resulting in an opportunity to re-join the longer-term uptrend at better levels.
 

EUR/USD Technical Considerations

EUR/USD comes up against near-term resistance via the prior low of 1.0757 which coincides with the 50 SMA, currently keeping prices at bay. The next level of resistance appears at 1.0805 and is the underside of the long-term trendline from 2017.

If prices are to turn lower from here, the 2020 low of 1.0635 comes into focus before a return to the zone of support at 1.0450.

EUR/USD Daily Chart

(Click on image to enlarge)

Source: TradingView, prepared by Richard Snow
 

IG Client Sentiment Turns Bullish After Profit Taking

The steady rise in EUR/USD has seen a reduction in net longs as traders exit longs and shift positioning closer to the short side. The contrarian indicator hints at a bullish continuation in price action as retail traders as a whole, shift out of longs and into shorts.

IG Client Sentiment (EUR/USD)

(Click on image to enlarge)

Source: IG, prepared by Richard Snow

• EUR/USD: Retail trader data shows 59.45% of traders are net-long with the ratio of traders long to short at 1.47 to 1.
• We typically take a contrarian view of crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall.
• The number of traders net-long is 10.76% lower than yesterday and 10.61% lower from last week, while the number of traders net-short is 13.63% higher than yesterday and 6.89% higher from last week.
• 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.
   

Major Risk Events Ahead

Core inflation in the eurozone is followed by ISM manufacturing and services data for the US which will be monitored closely for any worsening in the state of the US economy as recession concerns mount. Finally, on Friday we have the US non-farm payroll data.