ECB NEEDS TO MAKE A CHOICE

European Central Bank policymakers have been openly discussing the idea of a rate hike as soon as July, but that would require an end to the asset purchase program first in June. And while rates markets have been toying with such an idea for several months at this point, no one really seems to believe ECB officials that a rate hike will actually materialize – much to the Euro’s detriment in recent weeks.

In reality, ECB officials need to make a choice: either a full throated commitment to an interest rate hike this summer, which may finally help stem the Euro’s bleeding; or risk losing credibility in an environment where inflation pressures are running rampant, at the cost of an even weaker Euro.

As such, both EUR/JPY and EUR/USD rates remain susceptible to more short-term weakness, and their technical postures in the context of a weak fundamental backdrop dictate a continued mindset of ‘sell the rally.’ But EUR/GBP rates are in a different boat, thanks to the Bank of England’s dithering on its commitment to rate hike increases over the next few months. Indeed, EUR/GBP rates may be the best place to articulate a bullish EUR bias among the three major EUR-crosses.

EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (MAY 2021 TO MAY 2022) (CHART 1)

EUR/USD rates are holding below their March 2020 low at 1.0636, having nearly returned to the January 2017 low at 1.0340 last week following the break of the symmetrical triangle. Selling rallies remains appropriate given the bearish momentum present in the pair: EUR/USD rates are fully below their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order; daily MACD continues to trend lower below its signal line; and daily Slow Stochastics are nestled in oversold territory. Only a weekly close above 1.0636 would warrant a reconsideration of the prolonged bearish bias, which was discussed in both the 1Q’22 Top Opportunities and 2Q’22 Top Opportunities.

IG CLIENT SENTIMENT INDEX: EUR/USD RATE FORECAST (MAY 16, 2022) (CHART 2)

EUR/USD: Retail trader data shows 74.77% of traders are net-long with the ratio of traders long to short at 2.96 to 1. The number of traders net-long is 3.37% higher than yesterday and 3.74% higher from last week, while the number of traders net-short is 11.57% higher than yesterday and 9.48% 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 trading bias.

EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (MAY 2021 TO MAY 2022) (CHART 3)

EUR/JPY rates experienced a dramatic pullback last week, cracking through their daily EMA envelope before finding support around 133.15, the high established in February. But in this risk-off environment enveloping both bonds and stocks – as equity markets decline, government bond yields are coming down – EUR/JPY rates remain susceptible to further losses.

The momentum profile is turning more bearish. EUR/JPY rates are below their daily 5-, 8-, 13-, and 21-EMA envelope, which is not yet in bearish sequential order. Daily MACD is on the verge of crossing below its signal line, while daily Slow Stochastics are nearing a move into oversold territory. A drop below 132.50 would see EUR/JPY rates back within their channel from April 2021 through March 2022, which could portend a deeper setback to channel support below 127.00 in the coming weeks.

IG CLIENT SENTIMENT INDEX: EUR/JPY RATE FORECAST (MAY 16, 2022) (CHART 4)

EUR/JPY: Retail trader data shows 33.33% of traders are net-long with the ratio of traders short to long at 2.00 to 1. The number of traders net-long is 10.14% higher than yesterday and 18.91% lower from last week, while the number of traders net-short is 4.15% higher than yesterday and 18.70% 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 less net-short than yesterday but more 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 (APRIL 2021 TO MAY 2022) (CHART 5)

EUR/GBP rates may still be trading within the confines of an ascending triangle that has been forming since late-November 2021. The sharp decline on Thursday last week produced a daily bearish outside engulfing calendar, indicating that a near-term top has been established. But losses may not run that deep; indeed, since April 22, EUR/GBP rates have treated their daily 21-EMA (one-month moving average) as support on pullbacks. It would thus appear that any additional losses towards 0.8450 over the coming sessions should be sought after as an opportunity to scale into longs.

IG CLIENT SENTIMENT INDEX: EUR/GBP RATE FORECAST (MAY 16, 2022) (CHART 6)

EUR/GBP: Retail trader data shows 51.85% 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 18.89% higher than yesterday and 28.98% higher from last week, while the number of traders net-short is 3.14% lower than yesterday and 17.92% 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.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/GBP-bearish contrarian trading bias.