Looking to Sell Rallies in EUR/GBP, EUR/JPY, EUR/USD

Euro Outlook:Record COVID-19 infections, restrictions on travel, and a central bank in no hurry to raise rates make the Euro unappealing.The major EUR-crosses are heading back into resistance, suggesting that the recent rebound will be short-lived.Per the IG Client Sentiment Index, the majority of EUR-crosses have a bearish bias.Dead Cat BounceThe Euro has been trading choppily in recent days following the final European Central Bank rate decision of 2021, giving up initial gains but not setting new monthly lows, either. Some may see this as a sign of the Euro’s resiliency; others, like myself, attribute this to traders squaring shorts at the end of the calendar year. In other words, it’s a dead cat bounce, one that can’t be trusted as evidence that the worst is over for the Euro.Incoming economic data this week will only underscore the challenges facing the Euro in the near-term. The January German GfK consumer confidence survey due out on Tuesday is set to show the weakest sentiment reading since June as rising COVID-19 infections – omicron has fueled the highest rate of infections since the pandemic began – have ushered in new restrictions on economic activity. For example, the German government just announced a mandatory two-week quarantine from any visitors arriving from the UK, regardless of a negative COVID-19 test or vaccination status.Against this pandemic backdrop, the ECB has expressed that it is in no rush to normalize policy, leaving it further and further behind other major central banks like the Bank of England or Federal Reserve. Even though the ECB will begin winding down its Pandemic Emergency Purchase Programme (PEPP) over the next few months ahead of its termination in March 2022, bond buying under the Asset Purchase Program (APP) would increase. Holding steady the view that “monetary accommodation is still needed for inflation to stabilise at the 2% inflation target over the medium term,” the ECB won’t be raising rates in 2022 – even as inflation soars.All of this is a mix that makes the Euro unappealing in the short-term, setting up ‘sell the rally’ opportunities across EUR/JPY, EUR/GBP, and EUR/USD rates.EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (December 2020 to December 2021) (CHART 1)The net-result of the December ECB meeting is meaningless for EUR/USD rates, which are sitting right back at their level from Thursday morning. The series of lower highs and lower lows remains in place, and in context of the preceding move – a downtrend – the triangle consolidation calls for a continuation effort lower. EUR/USD rates are back below their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bearish sequential order. While daily MACD has been rising towards its signal line, daily Slow Stochastics have been dropping towards their median line; on balance, this mix favors a ‘sell the rally’ mindset. A return back to the yearly lows below 1.1200 – which coincided with the 61.8% Fibonacci retracement of the 2017 low/2018 high range at 1.1187 – remains the most likely outcome.IG Client Sentiment Index: EUR/USD Rate Forecast (December 20, 2021) (Chart 2)EUR/USD: Retail trader data shows 64.50% of traders are net-long with the ratio of traders long to short at 1.82 to 1. The number of traders net-long is 0.31% higher than yesterday and 3.53% lower from last week, while the number of traders net-short is 37.21% higher than yesterday and 2.74% higher from last week.We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall.Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/USD price trend may soon reverse higher despite the fact traders remain net-long.EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (December 2020 to December 2021) (CHART 3)EUR/JPY rates sold off sharply at the end of last week, once more finding support at a technical confluence: channel support in place going back to April; and the multi-decade descending trendline from the July 2008 and December 2014 highs. Like in EUR/USD rates, while daily MACD has been rising towards its signal line, daily Slow Stochastics have been dropping towards their median line; on balance, this mix favors a ‘sell the rally’ mindset. Accordingly, as noted previously, “it remains the case that selling rallies is the modus operandi in the near-term,” eying a drop below 127.00.IG Client Sentiment Index: EUR/JPY Rate Forecast (December 20, 2021) (Chart 4)EUR/JPY: Retail trader data shows 61.20% of traders are net-long with the ratio of traders long to short at 1.58 to 1. The number of traders net-long is 8.02% higher than yesterday and 11.08% lower from last week, while the number of traders net-short is 13.81% higher than yesterday and 5.91% lower from last week.We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/JPY prices may continue to fall.Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/JPY price trend may soon reverse higher despite the fact traders remain net-long.EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (December 2020 to December 2021) (CHART 5)EUR/GBP rates have the most muddled outlook among the three major EUR-crosses mentioned in this note. The pair has started to churn above its daily 5-, 8-, 13-, and 21-EMA envelope, but gains thus far have no reached a fresh 5-day high. Sideways price action has prevailed since the start of November, and a return to range resistance near 0.8595 is not out of the question before EUR/GBP rates reverse course and head lower. Provided the opportunity to sell ahead of 0.8600, however, remains appealing given the growing chasm between BOE and ECB policy.IG Client Sentiment Index: EUR/GBP Rate Forecast (December 20, 2021) (Chart 6)EUR/GBP: Retail trader data shows 51.41% of traders are net-long with the ratio of traders long to short at 1.06 to 1. The number of traders net-long is 3.23% higher than yesterday and 14.29% lower from last week, while the number of traders net-short is 6.45% higher than yesterday and 1.40% higher from last week.We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/GBP prices may continue to fall.Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/GBP price trend may soon reverse higher despite the fact traders remain net-long.— Written by Christopher Vecchio, CFA, Senior Strategist
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