Euro Vulnerable as Retail Traders Boost EUR/USD Upside Exposure, Where to?

Euro, EUR/USD, Technical Analysis, Retail Trader Positioning – IGCS Update

• Euro remains in a short-term downtrend vs the US Dollar
• Retail traders keep building upside exposure in EUR/USD
• Bullish Morning Star follow-through is falling apart

The Euro remains about 2.7% under the July high in what has been a short-term downtrend since the middle of last month. During this time, retail traders have been increasing their upside exposure in EUR/USD. This can be seen by looking at IG Client Sentiment (IGCS). IGCS typically tends to function as a contrarian indicator, especially in trending markets. With that in mind, is the single currency at risk of further losses?

EUR/USD Sentiment Outlook – Bearish

The IGCS gauge shows that about 58% of retail traders are net-long EUR/USD. Since most of them are now biased to the upside, this hints that prices may continue to fall down the road. This is as upside exposure increased by 21.3% and 16.07% compared to yesterday and last week, respectively. With that in mind, the combination of overall exposure and recent changes has strengthened the bearish contrarian trading bias.

Euro Daily Chart

On the daily chart, EUR/USD seems to be struggling to make further upside progress after a bullish Morning Star candlestick pattern emerged last week. That is underscoring the near-term bearish bias. But, prices have been unable to breach the 100-day Moving Average (MA). The latter has been maintaining the broader bullish bias.

From here, confirming a breakout under the 100-day MA opens the door to extending losses, placing the focus on the late June low of 1.0834. Breaking under that then exposes the May low of 1.0635 and a stronger bearish technical perspective. Otherwise, in the event of a turn higher, keep a close eye on the 23.6% Fibonacci extension level of 1.1003. Confirming a push above this price opens the door to revisiting the 38.2% level at 1.1231.

Chart Created in Trading View

— Written by Daniel Dubrovsky, Senior Strategist for DailyFX.com