Euro Technical Forecast: EUR/USD Building Up for Downtrend Resumption?

[MongiIG]

EURO, EUR/USD, MAJORS-BASED EURO INDEX, IGCS – TECHNICAL OUTLOOK

• Euro may be building up to resume the broader downtrend
• Bearish Rectangle in focus for a majors-based Euro index
• Will EUR/USD resume losses as retail traders go long?

MAJORS-BASED EURO INDEX – DAILY CHART

Looking at a majors-based Euro index - which averages the single currency against the US Dollar, Japanese Yen, British Pound and Australian Dollar – prices appear to be ranging within a potential Bearish Rectangle chart formation. This could hint at resuming the original trend prior to the rectangle’s inception, which would be to the downside.

In early February, prices tested the ceiling of the rectangle before turning lower. That has placed the focus on the floor of the formation. Breaking under the rectangle would expose the Euro’s average lowest price since the peak of its decline in 2020. On the flip side, clearing the ceiling could open the door to retesting summer 2021 highs.

Chart Created in TradingView

EUR/USD TECHNICAL ANALYSIS – DAILY CHART

How would this translate into EUR/USD? The pair recently rejected the 1.1453 – 1.1495 resistance zone after prices formed a Doji candlestick. This followed negative RSI divergence, which showed that upside momentum was fading. The 100-day Simple Moving Average on the daily chart below also played out as key resistance.

Further losses would see the Euro face the key 1.1122 – 1.1186 support zone, which also contains the June 19, 2020 low. Piercing through the latter would expose the 61.8% and 78.6% Fibonacci extensions at 1.1048 and 1.0927 respectively. Overturning the downward technical bias would likely involve a confirmatory upside close through the 1.1453 – 1.1495 resistance zone.

 

Chart Created in TradingView

IGCS OUTLOOK – MARKET POSITIONING

Taking a look at IG Client Sentiment, which can at times function as a contrarian indicator, about 53% of retail traders are net-long EUR/USD. Since most traders are biased to the upside, this suggests prices may continue falling. Upside exposure has also increased by 10.45% and 21.90% compared to yesterday and last week respectively. With that in mind, the combination of current and recent shifts in positioning are offering a stronger bearish contrarian trading bias.

*IGCS data pulled from February 15th

--- Written by Daniel Dubrovsky, Strategist for DailyFX.com. 15th Feb 2022