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EUR/USD may rise after key breakout - what are the risks?

EUR/USD could be setting up to test highs from 2018, but there are a couple of technical warning signs hinting that a euro turn lower may be brewing.

Euro and dollar Source: Bloomberg

EUR/USD technical analysis - talking points

  • Weekly chart hints EUR/USD setting up for further gains
  • Risks to the downside include RSI and rising net-long bets
  • Next critical resistance appears to be around 2018 highs

Euro technical analysis

On the weekly chart, EUR/USD is attempting to break above long-term falling resistance from 2011, signaling the potential for a reversal of the dominant downtrend since. This has exposed peaks from 2018, which would likely be the next major obstacle to the upside. Negative relative strength index (RSI) divergence warns that upside momentum is fading however, warning of a false breakout.

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EUR/USD weekly chart Source: TradingView
EUR/USD weekly chart Source: TradingView

Zooming in on the daily chart, the euro is struggling around the 38.2% Fibonacci extension at $1.2128 using the March to August trend with the pullback to November lows as the retracement. Still, the break above August highs was a significant technical achievement, underpinned by the bullish ‘golden cross’ that formed between the 20-day and 50-day simple moving averages (SMAs) in early November.

A push above the 38.2% level exposes a midpoint at $1.2290 on the way towards highs from 2018. Otherwise, in the event of a turn lower, the zone of resistance between $1.1932 and $1.2011 could establish itself as new support. This is also where the moving averages would come into play. These could maintain the focus to the upside, while a drop through them could open the door to testing the September low for further directional cues.

EUR/USD daily chart Source: TradingView
EUR/USD daily chart Source: TradingView

EUR/USD IG Client Sentiment outlook

IG Client Sentiment (IGCS), which is typically a contrarian indicator, paints a more worrying picture for EUR/USD. On 9 December, the tool showed that 34.37% of retail traders were net-long EUR/USD. Upside bets climbed by 3.41% and 23.12% over a daily and weekly basis respectively. This is as bearish exposure decreased by 8.74% and 12.93% over the same period.

Moreover, retail investors were the most net long since early November. Based on these developments, the changes in sentiment warn that the current price trend may soon reverse lower despite the fact traders remain net short overall. From a psychological perspective, that could mean that traders may start to increasingly bet on a would-be euro bottom if prices fall in the days ahead.

EUR/USD client positioning Source: DailyFX
EUR/USD client positioning Source: DailyFX

This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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