EUR/USD outlook: bullish momentum awaits US dollar signal

Price action in EUR/USD has been relatively uninspiring in recent sessions, with the pair trading in sideways fashion. The euro has managed to hold onto the $1.20 handle, which in turn keeps the outlook constructive for the currency. It has also been better bid against funding currencies (CHF, JPY), however, with euro specific newsflow relatively light, the price action will be likely determined by the US dollar in the near term.

On the technical front, resistance is situated at $1.2172, which continues to curb gains, thus a close above would likely prompt fresh upside momentum, opening the doors for a move towards $1.23. Meanwhile, the US dollar has had multiple tests below the $90.00 handle albeit with little follow through. It is worth noting that the reflation theme remains in full swing with oil prices continuing to rip higher, alongside base metals and while this is perhaps more beneficial for high-beta Forex against the US dollar, the narrative remains bearish for the greenback.

A chart that has grabbed my attention is the euro vs EU stoxx banking index, in which the latter continues to point towards a higher EUR/USD.

EUR/USD vs Stoxx Banking index

EUR/USD chart: daily time frame

IG client sentiment: EUR/USD

Retail trader data shows 44.23% of traders are net-long with the ratio of traders short to long at $1.26 to $1.00. The number of traders net-long is 17.43% higher than yesterday and 0.39% higher from last week, while the number of traders net-short is 5.61% lower than yesterday and 0.19% 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.

Yet traders are less net-short than yesterday, compared with last week. Recent changes in sentiment warn that the current EUR/USD price trend may soon reverse lower despite the fact traders remain net-short.