The euro could be vulnerable to selling pressure as retail traders increase their long exposure in EUR/USD and EUR/JPY.
The Euro has been consolidating against its major counterparts as of late, could this dynamic change next? It appears that retail traders are starting to increase their upside exposure in the single currency, betting to the upside in pairs like EUR/USD and EUR/JPY. This can be seen by examining IG Client Sentiment (IGCS), which tends to function as a contrarian indicator. Is this a sign of weakness to come for the Euro? For a deeper dive into the fundamentals, check out the webinar recording at the beginning of the article!
EUR/USD sentiment outlook - bearish
The IGCS gauge shows that about 59% of retail traders are net-long EUR/USD. Since the majority of traders are biased to the upside, this suggests that prices may continue falling. This is as upside exposure increased by 2.83% and 6.80% compared to yesterday and last week respectively. With that in mind, the combination of current and recent changes in sentiment offers a stronger bearish contrarian trading bias.
EUR/USD technical analysis – daily chart
On the daily chart, EUR/USD has been consolidating under the 1.0758 – 1.0806 inflection zone. It seems upside momentum is slowing from the early May bounce, a sign of weakness. A falling trendline from February is also maintaining the downside technical bias. Confirming a breakout under immediate support at 1.0627 could open the door to revisiting lows from 2017 (1.0340 – 1.0388). Otherwise, clearing resistance places the focus on the falling trendline from last year.
EUR/JPY sentiment outlook - bearish
The IGCS gauge shows that about 34% of retail traders are net-long EUR/JPY. Since most traders remain biased to the downside, this hints that the pair may continue rising ahead. However, upside positioning has increased by 12.44% and 31.89% versus yesterday and last week respectively. With that in mind, recent changes in sentiment warn that the current price trend may reverse lower.
EUR/JPY technical analysis – daily chart
From a technical standpoint, EUR/JPY remains strongly biased to the upside. The pair confirmed a breakout above the 139.14 – 140.00 resistance zone, exposing the peak from December 2013 at 145.69. But, immediate resistance appears to be the 61.8% Fibonacci extension at 142.30. Breaking above the latter would open the door to revisiting the December 2013 high. Otherwise, a turn lower would place the focus back on the former resistance zone, perhaps establishing itself as new support.
Daniel Dubrovsky | Currency Analyst, DailyFX, San Francisco
08 June 2022
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