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 turned a blind eye to. Progress over the approval of the Recovery Fund has come to a halt after Poland and Hungary vetoed the EU Budget given their objection that payments of the funds is made conditional on members adhering to democratic standards (rule of law). As such, this increases the risk of delaying the approval of the Recovery Fund for this year and subsequently the release of the funds. That said, with minimal signs of a solution to break the impasse, eyes will turn to the EU Council Meeting on 10 December - 11 December for a compromise to remain on track for implementing the Recovery Fund this year. Failure to reach a compromise and concerns over a delay will be heightened. A risk that markets appear to be under-pricing at this current stage.
To that end, with US Dollar short positioning remaining stretched, there 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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