Euro may rise as short bets follow EUR/USD to 2008 trendline

Euro, EUR/USD IG client sentiment - talking points

• The euro may rise as short bets accumulate
• EUR/USD is testing 2008 falling resistance
• Keep an eye out on negative relative strength index (RSI) divergence

EUR/USD IG client sentiment outlook

The euro could be readying to extend recent gains against the US dollar, based on signals from IG client sentiment (IGCS). On 6 August, the IGCS gauge implied that roughly 29% of retail investors were net-long EUR/USD. Exposure to the upside decreased by 25.92% and 16.51% over a daily and weekly basis respectively. Meanwhile, net-short bets have increased by 5.87% and 2.92% over the same periods.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short hint the world’s most-liquid forex pair could continue climbing. Recent changes in positioning offer a more potent bullish contrarian trading bias for EUR/USD. From a psychological standpoint, this could speak to the persistence of investors attempting to pick the next topping point in the euro.

EUR/USD client positioning

Euro technical analysis

With August now underway, EUR/USD is attempting to push above long-term falling resistance from 2008 – see monthly chart below. The July candle closed within this zone of resistance, maintaining the dominant downside bias in the euro. With IGCS signals pointing to the bullish side, this has placed the focus on the $1.1877 – $1.2043 inflection zone. Beyond that sit peaks from 2018, in the $1.2413 – $1.2556 region.

EUR/USD monthly chart

The daily chart shows that falling resistance from 2008 is already in the process of being taken out, though clear upside confirmation seems to be lacking. Negative RSI divergence has also emerged as prices push into the 2010-2012 inflection zone. This is a sign of fading upside momentum which can at times precede a turn lower. Such an outcome could place the focus on the 20-day simple moving average (SMA) below.

In the short to medium term, two layers of support could maintain the upside bias should prices decline instead. These form rising support from May and March – red lines on the daily chart below. Taking out the former could shift the focus to the downside. The latter could then reinstate an upward trajectory. Otherwise, clearing $1.2043 exposes the 78.6% Fibonacci retracement at $1.2145 on the way towards highs from 2018.

EUR/USD daily chart