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EUR/USD rally possible as sentiment data sends bullish signal

EUR/USD has been weakening as risk-averse investors move into the perceived safety of the US dollar. However, IG client sentiment data suggests a bounce may be due.

EUR/USD Source: Bloomberg

Bullish signal for EUR/USD

The EUR/USD currency pair has been falling steeply as traders opt for the relative safety of the US dollar amid concern about the eurozone economy and a possible second wave of Covid-19 infections in Europe. That can be seen on the following one-hour chart tracking the pair over the past week.

EUR/USD Source: IG charts
EUR/USD Source: IG charts

However IG client sentiment data (IGCS), which track the positioning of retail traders using the company, suggest a reversal. The numbers show that more traders are now short – expecting the pair to fall – than are long. With just 40.30% of traders net long, the ratio of traders short to long is 1.48 to 1. 

Moreover, the number of traders net long is 3.84% lower than on Wednesday and 0.68% lower than last week, while the number of traders net short is 1.49% higher than on Wednesday and 14.32% higher than last week.

IG Client sentiment on EUR/USD Source: DailyFX
IG Client sentiment on EUR/USD Source: DailyFX

At DailyFX, IG’s news and research website, we typically take a contrarian view to crowd sentiment, and the fact traders are net short suggests EUR/USD prices may rise. Also, traders are further net short than on Wednesday and last week, and the combination of current sentiment and recent changes gives us a EUR/USD-bullish contrarian trading bias.

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