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EUR/USD breakout post-Fed at risk as euro long bets fade

Confirming the EUR/USD downside breakout after the Fed rate cut could be difficult given potential reversal technical signals and fading euro net long bets.

​EUR/USD IG client sentiment talking points

  • EUR/USD tumbled after the Fed surprised with less-dovish rate cut
  • IG client sentiment is offering a bullish euro outlook
  • Support breakout undermined by hammer candlestick

EUR/USD IG client sentiment outlook: bullish

On 31 July financial markets were disappointed as the Federal Reserve (Fed) cut interest rates for the first time since 2008. Fed chair Jerome Powell arguably delivered a tone that was less dovish than anticipated when he mentioned that the central bank’s action was not necessarily the beginning of a lengthy cutting cycle. Since then, the US dollar lost some steam against the euro as US-China trade tensions refueled local easing bets.

Since 1 July, we saw traders increase EUR/USD net long exposure as the pair traded over 3% lower. However, according to the latest IG client sentiment update from 1 August, EUR/USD net long exposure shrunk 4.4% and 6.7% compared to the previous day and week respectively. In total, those readings left 73% of euro traders biased towards the long side, down from about 74% on 31 July.

As a contrarian indicator, this is offering an early warning sign that the current euro price trend may soon reverse higher. In other words, in the coming days and weeks, we could see EUR/USD net long exposure unwind as traders’ bets on picking where the pair could bottom fade. On the flip side, should this dynamic reverse course, this may rekindle downside pressure in the euro.

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EUR/USD technical analysis: downside breakout eyes confirmation

The 0.75% decline in EUR/USD on 31 July resulted in the currency pair taking out the key psychological barrier between $1.1110 and $1.1132. This area consisted of the lows achieved in May and June of 2017 which on multiple occasions tamed the euro downtrend earlier this year. As a result of the downside push, this has exposed prices that were last achieved in April of the same year.

A close under the 78.6% Fibonacci retracement at $1.1048 may be bearish technical confirmation that paves the way for a test of $1.0950. However, the latest attempt to do so left a long wick as EUR/USD formed a hammer candlestick below. This is a sign of indecision and with upside confirmation, may precede a reversal. Keep a close eye on former support which may hold as resistance at the outer boundary of $1.1132.

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