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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.

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. See full non-independent research disclaimer and quarterly summary.

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