Euro (EUR) Price Outlook: No End Yet in Sight for EUR/USD Weakness

EUR/USD WEAKNESS TO PERSIST

The tumble in EUR/USD that has taken it from a high of 1.2266 on May 25 to only just above 1.13 now shows no sign of ending anytime soon. Indeed, the price has now broken below the support line connecting the lower lows of a downward-sloping channel in place since that May date and this means it could drop much further, perhaps to the lows around 1.1170 reached in June last year.

As always, a near-term bounce cannot be ruled out but a sustained rally looks very unlikely even though the 14-day relative strength index, or RSI, that can seen at the bottom of the chart below is now under the 30 level that suggests the pair has been oversold.

EUR/USD PRICE CHART, DAILY TIMEFRAME (MAY 24 – NOVEMBER 17, 2021)

ECB PUSHES BACK AGAINST RATE RISES

From a fundamental perspective, the key problem for Euro bulls is that ECB President Christine Lagarde is still arguing that tightening monetary policy now to rein in Eurozone inflation would throttle the Eurozones economic recovery – and that economists and the markets are still too hawkish.

Even after the Covid-19 pandemic ends “It will still be important that monetary policy – including the appropriate calibration of asset purchases – supports the recovery throughout the Euro area and the sustainable return of inflation to our target of 2%,” she said earlier this week.

This contrasts with market speculation that the Federal Reserve will accelerate the tapering of US monetary measures to boost economic growth as US inflation remains stubbornly high, and that the Bank of England will raise UK interest rates on December 16, also to counter strong inflationary pressures.

SENTIMENT DATA BEARISH

Turning to the positioning of retail traders, IG client sentiment data also argue for a still weaker Euro. The numbers show 71.59% of EUR/USD traders are net-long, with the ratio of traders long to short at 2.52 to 1. The number of traders net-long is 3.32% lower than yesterday but 23.26% higher than last week, while the number of traders net-short is 10.31% lower than yesterday and 32.38% lower than 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.Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/USD-bearish contrarian trading bias.