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EUR/USD: risks to the big euro long

Stretched positioning looks to have left risk-to-reward ratio favouring a euro pullback.

EUR/USD Source: Bloomberg

EU outperformance of US beginning to wane

This week has largely been characterised by a lot of indecision across the forex space and rightly so, given that key catalysts and economic data has been lacking.

However, after the sizeable miss in eurozone PMI’s at the backend of last week (most notably from France), questions have been raised over the optimism regarding the European Union (EU) recovery. As such, the argument for growth differentials supporting the euro relative to the US is beginning to wane.

Daily chart Source: Refinitiv
Daily chart Source: Refinitiv

ECB minutes air on the side of caution

The European Central Bank (ECB) has also aired on the side of caution with regard to the EU recovery narrative, suggesting that there may be complacency building in light of recent price action in the euro. In which a continued rise in the absence of a fundamental alignment raises the likelihood that the ECB could intervene in tempering euro upside.

The big euro long

As I have highlighted in our positioning sentiment report with positioning in the euro longs at stretched levels, risk-to-reward ratio favours corrective move lower. In turn, this puts the $1.17 handle in focus, with a sharp break likely to open the doors towards $1.15, which in affect can stave off risks of ECB jawboning.

Euro longs Source: Refinitv
Euro longs Source: Refinitv

IG retail trading sentiment

Trader data shows 39.07% of traders are net long with the ratio of traders short to long at 1.56 to one. The number of traders net long is 3.02% higher than yesterday and 1.85% lower from last week, while the number of traders net short is 1.51% higher than yesterday and 4.96% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net short suggests EUR/USD prices may continue to rise.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/USD price trend may soon reverse lower despite the fact traders remain net short.

The information 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 Bank S.A. 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 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. See full non-independent research disclaimer.

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