EUR/USD shorts spike amid second wave and stimulus uncertainty

EUR/USD traders turn more bearish as coronavirus restrictions mount across the eurozone, but spot prices could rally if US politicians reach a stimulus deal.

EUR/USD price action has surged about 130 points since Friday’s close and currently trades at month-to-date highs. Yet, retail forex traders have grown increasingly bearish toward EUR/USD over recent trading sessions according to IG Client Sentiment (IGCS). In fact, trader positioning data reveals a massive 38% increase in shorts and 34% decrease in longs week-on-week.

EUR/USD positioning - IGCS

This has caused EUR/USD net long positioning to drop to just 27%, which is the lowest reading since mid-July. Mounting second wave risk as new coronavirus cases spike and restrictions on business activity are reimplemented stands out as one fundamental narrative with potential to steer EUR/USD price action lower.

Also, in light of political gridlock headed into the November 2020 election, US fiscal stimulus uncertainty has lingered as a headwind with the possibility of a breakdown in negotiations threatening to send the EUR/USD into a tailspin.

EUR/USD price chart (1 May to 20 October 2020)

That said, IGCS can be looked at through a contrarian lens seeing that changes in retail forex positioning generally mirror spot prices.

A contrarian view means going in the opposite direction of the crowd. This relationship is illustrated in the EUR/USD chart above with spot prices broadly moving against retail forex trader positioning. Correspondingly, seeing the combination of current sentiment and how traders are further net-short compared to last week as detailed in the latest IGCS recent changes in positioning points to a stronger EUR/USD bullish contrarian trading bias.

EUR/USD price chart (11 August to 20 October 2020)

Not to mention, the push higher by EUR/USD price action over the last two trading sessions has propelled the major currency pair back above its 50-day simple moving average (SMA). The rally also appears to have pierced its downward-sloping trendline extended through the series of lower highs since the euro topped out in August.

Furthermore, the strong advance by EUR/USD off the $1.17 price level so far this week is underscored by bullish divergence as suggested by the moving average convergence/divergence (MACD) indicator. Probing the upper barrier of its Bollinger Band could hinder EUR/USD upside potential, but Bollinger Band width expansion could follow a build-up of buying pressure if a US stimulus deal is reached.

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