Euro Forecast: Turnaround in EUR/JPY, EUR/USD Gathers Pace; EUR/GBP Rangebound
- The Euro has been registering an important technical turnaround after last week’s breakdown: EUR/USD is above its 21-EMA while EUR/JPY has broken a multi-month downtrend.
- After EUR/GBP’s rally over the past two weeks, the pair finds itself back in familiar territory: the range that has encompassed price action since late-February.
- Per the IG Client Sentiment Index, EUR/USD has a bullish bias while EUR/GBP and EUR/JPY are mixed.
Euro Gains Ahead of Minutes, Jackson Hole
As speculation builds ahead of the Federal Reserve’s Jackson Hole Economic Policy Symposium, the Euro has enjoyed a bit of a rebound. Rallying equity markets and rising bond yields have helped propel EUR/JPY rates higher, while the broad drop by the US Dollar (via the DXY Index) has aided EUR/USD’s recovery.
While these technical turnarounds appear significant, it’s possible that the rallies are burdened by the release of the ECB’s July meeting minutes on Thursday – ahead of what will likely be a volatile Friday around Fed Chair Jerome Powell’s Jackson Hole speech.
Last month, the ECB announced the results of its 18-month policy review, with the central bank shifting its inflation mandate from seeking “below but close to +2%” to “+2%.” Today, ECB Chief Economist Philip Lane added color to the conversation in a blog post. “The revision to rate forward guidance constitutes just the first step in implementing our new strategy.”‘Lower for longer’ remains the mantra for the ECB, and any additional color to this end could ultimately impede the nascent Euro turnaround.
EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to August 2021) (CHART 1)
EUR/USD rates briefly set a fresh yearly low last week in falling below a confluence of Fibonacci retracements, but the losses were short-lived as a reversal has taken shape in recent days. More work needs to be done before bullish momentum conditions take hold, however. The daily EMA envelope is not yet in bullish sequential order. Daily MACD is rising, but remains below its signal line, and daily Slow Stochastics are just starting to climb through their median line. Perhaps importantly, EUR/USD is on the cusp of closing above its daily 21-EMA for the first time since August 3, a hint that the downtrend over the past few weeks may be exhausted.
IG Client Sentiment Index: EUR/USD Rate Forecast (August 25, 2021) (Chart 2)
EUR/USD: Retail trader data shows 52.67% of traders are net-long with the ratio of traders long to short at 1.11 to 1. The number of traders net-long is 6.59% lower than yesterday and 23.72% lower from last week, while the number of traders net-short is 9.89% higher than yesterday and 32.22% higher 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.
Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/USD price trend may soon reverse higher despite the fact traders remain net-long.
EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (April 2020 to August 2021) (CHART 3)
EUR/JPY rates have taken two important steps in recent days to ward off a more significant decline. First, they’ve rebounded above the descending trendline from the July 2008 and December 2014 highs before bouncing, which also coincided with support in the form of the 38.2% Fibonacci retracement of the 2018 high/2020 low range at 128.88. Second, the downtrend in place since mid-June has been broken, suggesting that the worst of the selling is over.
Concurrent to these developments, EUR/JPY rates are nearing their first close above their daily 21-EMA since June 16, an early signal that a bottom has been carved out. More confidence in a turnaround higher will be ascertained if the pair is able to weather the July ECB meeting minutes and the Jackson Hole fireworks over the next few days.
IG Client Sentiment Index: EUR/JPY Rate Forecast (August 25, 2021) (Chart 4)
EUR/JPY: Retail trader data shows 46.04% of traders are net-long with the ratio of traders short to long at 1.17 to 1. The number of traders net-long is 12.28% higher than yesterday and 21.79% lower from last week, while the number of traders net-short is 1.53% lower than yesterday and 39.32% higher 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 (August 2020 to August 2021) (CHART 5)
EUR/GBP rates have been in a sideways range for the better part of six months now, and after briefly falling below range lows earlier this month, the pair finds itself squarely back in the middle of its range. For momentum traders, this is an unattractive situation; for range traders, this is an unattractive situation. As noted previously, “this may be the one [EUR-cross] to stay away from over the coming days; clearer opportunities exist elsewhere.”
IG Client Sentiment Index: EUR/GBP Rate Forecast (August 25, 2021) (Chart 6)
EUR/GBP: Retail trader data shows 52.26% of traders are net-long with the ratio of traders long to short at 1.09 to 1. The number of traders net-long is 5.32% higher than yesterday and 15.81% lower from last week, while the number of traders net-short is 2.02% higher than yesterday and 8.82% higher 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.
Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/GBP trading bias.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist