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EUR/USD price outlook: has the rally gone too far too fast?

EUR/USD at risk of corrective pullback amid sizeable rally.

EUR/USD price analysis and news

  • US dollar short trade is crowded
  • EUR/USD technically overbought

The euro has gone from strength to strength throughout July with the currency on course for its best month (+4.3%) since March 2016. However, as noise over the collapse in the US dollar grows louder by the day, we question whether the euro may have gone too far too fast and thus see risks of a potential correction in the currency. That said, the absence of a correction leaves the euro set to march towards the $1.20 handle.

Understandably, the euro has seen a sizeable appreciation in recent months, given the historic agreement in the EU for joint fiscal action. Alongside this, the eurozone appears to be handling coronavirus somewhat more effectively than its US counterpart, while the persistent drop in US yields has reduced the cost to be bearish on the US dollar.

However, we believe the so-called demise of the US dollar, which has been increasingly reported in recent weeks is somewhat exaggerated. As such, in light of this notable bearish sentiment towards the US dollar, which has also been reflected in speculative positioning as reported by the Commodity Futures Trading Commission (CFTC), there is a risk of a bounce-back in the greenback to the euro’s detriment. Another factor to take into consideration is the recent pick-up in virus cases in Europe, most notably Spain, which saw the highest case count since April (new daily cases exceeded 6000).

CFTC positioning signals crowded short US dollar trade

EUR/USD price chart: daily time frame

IG Client Sentiment

Retail trader data shows 34.59% of traders are net long with the ratio of traders short to long at 1.89 to 1. The number of traders net long is 8.53% higher than yesterday and 2.72% lower from last week, while the number of traders net short is 0.70% lower than yesterday and 0.42% 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. 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/USD trading bias.

This information has been prepared by IG, a trading name of IG Markets Limited. 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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