Euro Fundamental Forecast – EUR/USD May Struggle in the Short-Term

The Euro continues to move higher against a range of other currencies, making fresh multi-month highs against the US dollar, the British Pound, and the Swiss Franc amongst others. The single currency is being buoyed by ongoing, official, Euro rate hike expectations while other countries are beginning to pare back future rate increases. This interest rate widening differential is aiding the Euro as it moves higher.

The Eurozone bond market however is not moving in synch with these Eurozone rate expectations with yields across the curve falling. The yield on the German 10-yr Bund is 45 basis points lower over the last 2 weeks, while the Italian 10-year BTP has shed nearly 80 basis points over the same time frame. Lower bond yields in the US have helped this move but – in line with the US – growing expectations that the ECB will have to temper rate hikes due to growing recessionary fears are forcing longer-dated bond yields lower. Eurozone bond yields, and the rate differentials with other countries, will need to be closely followed in the weeks and months ahead.

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The economic calendar is reasonably quiet next week with the ZEW Economic Sentiment data the only release with any market-moving potential. The two inflation readings next week are final figures and should not deviate too far from their original readings.

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Sentiment in Germany and the Euro Area has been steadily improving since August, albeit from a woefully weak level, and this is expected to continue in January as energy prices fall further.

Euro Area ZEW Economic Sentiment

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EUR/USD Daily Price Chart – January 13, 2023

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The Euro has appreciated by over 14% against the US dollar since its late-September nadir and further gains are likely but may be limited. A positive set of moving averages, including a 50-day/200-day golden cross on December 28, and a series of higher lows and higher highs suggest the pair will test the April 2022 high at 1.0937 sooner rather than later. The pair are due for a period of consolidation – the CCI indicator is heavily in overbought territory – and this may play out over the next couple of weeks. A zone of short-term support exists between 1.0700 and 1.0735.

Retail Traders Cut Long Positions

Retail trader data show 30.72% of traders are net-long with the ratio of traders short to long at 2.26 to 1.The number of traders net-long is 8.37% lower than yesterday and 41.26% lower from last week, while the number of traders net-short is 2.21% lower than yesterday and 41.23% higher 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. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/USD-bullish contrarian trading bias.

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