Technical analysis of the euro: the rally could have another stage
- The euro started May on a rocky footing, but may well turn the corner after a trio of EUR crosses rebounded in their daily 21-EMAs.
- EUR / JPY and EUR / USD are close to the multi-year downtrend, while EUR / GBP may still have more room for maneuver on the upside.
- Through the IG Client Sentiment Index, the euro has a different bias among its main crosses.
Euro reverses difficult start to May
The first trading days of May proved to be difficult trading grounds for the euro, perhaps besieged by the fact that the fifth month of the year was also the the worst month of the year, from the point of view of seasonality. For better or worse, the euro remains without a significant catalyst, having been in the whim of wider risk trends; for now, gains in global stock markets and bond yields. This proved fertile ground for the EUR’s trio of major crosses to rebound from the daily 21-EMAs after several days of weakness to start May.
TECHNICAL ANALYSIS OF EUR / USD RATE: DAILY GRAPHIC (March 2020 to April 2021) (GRAPHIC 1)
The EUR / USD decline was halted at the daily 21-EMA as well as a long-standing confluence of technical levels that were established as both support and resistance going back to last July: the Fibonacci retracement at 76, 4% of the 2019/20 high-end low at 1.1945; the August and September 2020 highs at 1.1967 and 1.2011, respectively; and the 23.6% Fibonacci retracement of the 2017/2018 high-end low at 1.2033. If EUR / USD rates rise higher from here, a break above the descending trendline from the swinging highs of January and February would be a strong indication that a more meaningful rally is starting to unfold. .
IG Client Sentiment Index: EUR / USD rate forecast (May 6, 2021) (Chart 2)
EUR / USD: Retail trader data shows 36.54% of traders are net long with a short / long ratio of 1.74 to 1. The number of net long traders is 3.38% lower than that of yesterday and 2.45% higher than last week, while the number of net-short traders is 0.57% higher than yesterday and 2.89% lower than last week.
We generally take a vexing view of crowd sentiment, and the fact that traders are net-short suggests that EUR / USD prices may continue to rise.
The positioning is more net-short than yesterday but less net-short than last week. The combination of current sentiment and recent changes gives us another mixed EUR / USD trading bias.
EUR /JPY TECHNICAL ANALYSIS OF PRICES: DAILY GRAPHIC (March 2020 to May 2021) (GRAPHIC 3)
In the previous update it was noted that “a dip could be ahead before another crack to new annual highs”. EUR / JPY rates closed April hitting new annual highs, but May saw a slight setback against the daily 21-EMA, which served as support. In line with the previously established opinion that “a bullish flag has formed between 128.19 and 130.66”, and that “EUR / JPY rates are still grappling with a break of the downtrend from highs 2008 (all-time high) and 2014 ”EUR / JPY rates may have seen the anticipated“ drop ”and are poised to continue their bullish breakout through the downtrend line back to the July 2008 high (unprecedented).
IG Client Sentiment Index: EUR / JPY rate forecast (May 6, 2021) (Chart 4)
EUR / JPY: Retail trader data shows that 41.06% of traders are long net with the ratio of short to long traders of 1.44 to 1. The number of long net traders is 14.02% more higher than yesterday and 19.44% higher than last week, while the number of net-short traders is 9.81% lower than yesterday and 9.62% lower than last week.
We generally take a vexing view of crowd sentiment, and the fact that traders are net-short suggests that EUR / JPY prices may continue to rise.
However, traders are less net-short than yesterday and compared to last week. Recent sentiment shifts warn that the current EUR / JPY price trend may soon reverse lower despite traders remaining net-short.
EUR /GBP TECHNICAL ANALYSIS OF PRICES: DAILY GRAPHIC (February 2020 to May 2021) (GRAPHIC 5)
Following their lower bullish breakout, EUR / GBP rates have traded in an ascending triangle, suggesting that more upside may be ahead in the coming weeks. As a result, with EUR / GBP rates in the midst of consolidation, there is still more time before a decisive directional break can be determined. With a daily flat MACD and daily Slow Stochastics holding their midline, momentum is decidedly neutral in the near term; better opportunities may exist elsewhere.
IG Client Sentiment Index: EUR / GBP rate forecast (May 6, 2021) (Chart 7)
EUR / GBP: Retail trader data shows that 52.08% of traders are net long with the long to short ratio of 1.09 to 1. The number of net long traders is 11.80% lower than yesterday and 14.21% lower than last week, while the number of net-short traders is 9.78% lower than yesterday and 12.02% lower than last week.
We generally take a vexing view of crowd sentiment, and the fact that traders are net long suggests that EUR / GBP prices may continue to fall.
However, traders are shorter than yesterday and compared to last week. Recent sentiment shifts warn that the current trend in EUR / GBP prices may soon turn higher despite traders remaining net long.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist