EUR/USD Price Outlook: Dollar Recovery Threatens Euro Gains

[MongiIG]

EUR/USD Analysis:

• Dollar recovery looks to end EUR/USD upside; key technical levels assessed
• EU inflation data, ECB speeches, ZEW sentiment and PMI data ahead
• IG client sentiment at odds with large speculators “smart money”

 

EUR/USD has been climbing steadily within an ascending channel until Wednesday, when the US dollar experienced a sell-off. Despite US inflation reaching a near 40 year high - coming in at the forecasted figure of 7% - the release was interpreted by markets as a bit of a letdown, sending the dollar tumbling.

Markets had already priced in an aggressive Fed response to rising inflation, propping up the dollar, and therefore, anything less than a surprise above 7% was likely to disappoint. The EUR/USD pair passed 1.1400 with ease but fell short of 1.1500, proving too hot to handle

MAJOR RISK EVENTS FOR THE WEEK AHEAD

The economic calendar has started to fill up in the third full week of January. Today we have a Eurogroup meeting discussing economic adjustments and resilience among other topics. Tomorrow we have the ZEW economic sentiment index and Wednesday the all important core inflation for the Eurozone – which is not expected to be a market mover as the headline figure is where energy and food costs are likely to show a much higher reading of inflation.

The week comes to a close with speeches from a couple of high profile ECB speeches and flash Markit manufacturing PMI data.

Customize and filter live economic data via our DaliyFX economic calendar

KEY TECHNICAL LEVELS FOR EUR/USD THIS WEEK

After a failed attempt at 1.1500, the upward momentum in EUR/USD seems to have faded. Bear in mind that most of the recent move to the upside could easily be attributed to a weaker dollar as opposed to Euro strength so naturally, we should be on the lookout for stabilization in the dollar which looks to have been achieved on Friday last week.

If the dollar is to recover last week’s losses, this may propel EUR/USD lower once again. A breakdown of the 1.1400 level brings the 1.1350 level into focus with the more distant 1.2750 level the next major level of support.

A hold of 1.1400 keeps the bullish narrative alive, for the time being at least. Near-term resistance is rather difficult to come by and therefore the next hurdle for the pair remains the recent high at 1.1483, followed by the 1.1500 psychological level.

4-hour EUR/USD Chart

Source: IG, prepared by Richard Snow

 

SENTIMENT DIVERGENCE (LARGE SPECULATORS VS RETAIL SENTIMENT)

By taking a look at the most recent CFTC data from the commitments of traders report, there is still a significant net-long positioning on the US dollar index where the Euro makes up 57.6% of the index. The data corresponds to hedge funds and other large speculators that are required to report trades to the CFTC. The continued long positioning suggests that the outlook on the dollar is still bullish despite the recent sell-off which could weigh on the EUR/USD pair.

US Dollar Index and Net Positions (Cot data from CFTC)

Source: CoT data via the CFTC, Refinitiv, prepared by Richard Snow

In contrast, IG client sentiment shows more than 56% of traders are long EUR/USD (bullish Euro) with a massive increase in net longs from yesterday (+17.55%).

• Retail trader data shows 56.15% of traders are net-long with the ratio of traders long to short at 1.28 to 1.
• We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall.
• The number of traders net-long is 17.55% higher than yesterday and 4.16% higher from last week, while the number of traders net-short is 7.76% higher than yesterday and 2.36% lower from last week.
• Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes suggests a EUR/USD-bearish contrarian trading bias.

 

Written by Richard Snow for DailyFX.com. 17th Jan 2022.