EUR/USD price outlook: has the rally gone too far too fast?

EUR/USD price analysis and news

• US dollar short trade is crowded
• EUR/USD technically overbought

The euro has gone from strength to strength throughout July with the currency on course for its best month (+4.3%) since March 2016. However, as noise over the collapse in the US dollar grows louder by the day, we question whether the euro may have gone too far too fast and thus see risks of a potential correction in the currency. That said, the absence of a correction leaves the euro set to march towards the $1.20 handle.

Understandably, the euro has seen a sizeable appreciation in recent months, given the historic agreement in the EU for joint fiscal action. Alongside this, the eurozone appears to be handling coronavirus somewhat more effectively than its US counterpart, while the persistent drop in US yields has reduced the cost to be bearish on the US dollar.

However, we believe the so-called demise of the US dollar, which has been increasingly reported in recent weeks is somewhat exaggerated. As such, in light of this notable bearish sentiment towards the US dollar, which has also been reflected in speculative positioning as reported by the Commodity Futures Trading Commission (CFTC), there is a risk of a bounce-back in the greenback to the euro’s detriment. Another factor to take into consideration is the recent pick-up in virus cases in Europe, most notably Spain, which saw the highest case count since April (new daily cases exceeded 6000).

CFTC positioning signals crowded short US dollar trade

EUR/USD price chart: daily time frame

IG Client Sentiment

Retail trader data shows 34.59% of traders are net long with the ratio of traders short to long at 1.89 to 1. The number of traders net long is 8.53% higher than yesterday and 2.72% lower from last week, while the number of traders net short is 0.70% lower than yesterday and 0.42% 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. Positioning is less net short than yesterday but more net short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD trading bias.