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Euro poised for minor rebound against dollar amid market uncertainty

Despite speculation of a minor rebound, the Euro continues to struggle against the dollar as an excess of long positions and disappointing Euro area economic figures add pressure.

Source: Bloomberg

The euro is beginning to look a bit oversold at least against the US dollar ahead of key Euro area inflation data, opening the door for a minor rebound. However, the pace and the extent of the fall this month have raised the bar for a sustained move higher in the single currency.

Overbought conditions, stretched positioning, and hawkish repricing in US rates triggered a pause in the euro’s two-month rally against the US dollar.

Economic surprise index and FX positioning

Source: chart created by Manish Jaradi, TradingView

While overbought conditions have reversed, positioning remains unchanged. Despite the recent slide, long speculative EUR positioning is running around the highest since 2020 and within the major currency space (see chart), suggesting continued overcrowded conditions for the single currency.

EUR/USD daily chart*

Source: chart created by Manish Jaradi, TradingView

From a macro perspective, Euro area macro data have been underwhelming, further weighing on EUR. The Economic Surprise Index (ESI) for the Euro area continues to slide, even as the ESI for the US appears to have stabilized recently (see chart).

Key focus is now on German inflation data due on Wednesday and Euro area figures on Thursday, and US jobs data on Friday.

EUR/USD weekly chart

Source: chart created by Manish Jaradi, TradingView

Money markets are pricing in more than two rate hikes while pushing back a peak in rates to December. In this regard, Irish central bank chief Gabriel Makhlouf said last week that more than two ECB rate hikes this year are possible given stubborn inflation.

In contrast, markets are pricing in a 63% chance of a 25 bps Fed rate hike at the June meeting up from 25% a week ago, according to the CME FedWatch tool.

EUR/USD: Short-term trend is down

As the colour-coded candlestick 240-minute charts show, based on trending/momentum indicators, EUR/USD is in a bearish phase. However, on the daily charts, EUR/USD has moved to a consolidation phase within the bullish structure that started in late 2022 - a risk highlighted in early May.

EUR/USD’s drop below the lower edge of the Ichimoku cloud on the daily chart is a signal that the upward pressure has faded slightly in the short term. A stronger cushion is at the March low of 1.0510, near the 200-day moving average, which could contain the current downtrend. On the upside, the mid-May high of 1.0900 could pose stiff resistance.

EUR/USD daily chart

Source: chart created by Manish Jaradi, TradingView

EUR/GBP: Bias remains down

The stall in the downtrend could be a sign of delayed decline, rather than a reversal in EUR/GBP’s fortunes. The cross would need to rise above immediate resistance at 0.8750 for the bearishness to fade. Until then, the bias remains for a move toward the December low of 0.8545.

EUR/GBP daily chart

Source: chart created by Manish Jaradi, TradingView

EUR/AUD: Upside could be capped for now

EUR/AUD risks a retest of the 1.5950-1.6050 area (including the December high and the 89-day moving average). This follows a retreat last month from a tough barrier at the October 2020 high of 1.6825.

For a more comprehensive discussion, see “Australian dollar ahead of budget”, published May 9.

EUR/AUD daily chart

Source: chart created by Manish Jaradi, TradingView

*Note: In the above colour-coded chart, blue candles represent a Bullish phase. Red candles represent a Bearish phase. Grey candles serve as Consolidation phases (within a Bullish or a Bearish phase), but sometimes they tend to form at the end of a trend. Note: Candle colors are not predictive – they merely state what the current trend is. Indeed, the candle color can change in the next bar. False patterns can occur around the 200-period moving average, or around a support/resistance and/or in sideways/choppy market. The author does not guarantee the accuracy of the information. Past performance is not indicative of future performance. Users of the information do so at their own risk.

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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