EUR/USD outlook: EUR/USD vulnerable to month-end volatility

Euro recovers from US Dollar short squeeze, however, EUR/USD remains vulnerable below $1.192.

Choppy price action across the G10 complex with the Euro hovering within close vicinity to the $1.19 handle. That said, with the US Thanksgiving Holiday and month-end upon us, market liquidity is likely to be lighter and thus flow driven moves stemming from month-end rebalancing is likely to be exacerbated as evidenced on Monday. While the Euro has recovered from the recent USD short squeeze, EUR/USD has stopped short of reaching key topside resistance at $1.192, as last week’s high zone holds ($1.188-$1.90).

The Euro, however, is not without short-term risks, which as it stands, has largely taken a blind eye to. Poland and Hungary have vetoed further progress over the EU Budget and Recovery Fund in response to the rule of law. Although, with minimal signs of a solution to break the impasse, concerns will likely rise over a delay in the implementation of the recovery fund. A risk that markets appear to be under-pricing at this current stage.

To that end, with US Dollar short positioning remaining stretched, their remains a continued risk of USD short squeezes, leaving EUR/USD vulnerable to pullbacks towards $1.18. A break below raises scope for a move to $1.175, while a move above $1.192 would negate an initial downside bias.

EUR/USD chart: hourly timeframe

IG client sentiment: EUR/USD

Retail trader data shows 28.51% of traders are net-long with the ratio of traders short to long at 2.51 to 1. The number of traders net-long is 6.98% lower than yesterday and 16.78% lower from last week, while the number of traders net-short is 4.38% lower than yesterday and 2.74% 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.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/USD-bullish contrarian trading bias.

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