Can the ECB Stop the Slide? Setups for EUR/GBP, EUR/JPY, EUR/USD

Euro Outlook:

• Markets are pricing in a 75-bps rate hike from the European Central Bank on Thursday.
• Charts suggest that the Euro could trade higher in the coming days, but the ECB will need to provide the spark.
• Per the IG Client Sentiment Index, EUR/GBP rates have a bullish bias, while EUR/JPY and EUR/USD rates have a mixed bias.

Whatever it Takes?

In recent weeks, European Central Bank policymakers have changed their tone since the middle of the summer. While the July ECB meeting minutes revealed that there was a split over the 50-bps rate hike, intensifying Eurozone inflation pressures thanks to surging energy prices have a 75-bps rate hike now favored as the most likely outcome this week.

The ECB might be dealing with the most difficult set of circumstances among the major central banks, as a significant recession appears increasingly likely over the coming months; stagflation is coming to the Eurozone (if it’s not here already), which is bad news for the Euro. Thankfully for the Euro, other currencies are dealing with equal or worse problems, masking weakness in several of the major EUR-crosses.

With a 75-bps rate hike effectively discounted by markets, all eyes will be on ECB President Christine Lagarde’s press conference to see what kind of path policymakers lay out to show determination in the face of a rapidly eroding economic situation. ECB President Lagarde needs to channel her inner Mario Draghi and find her “whatever it takes” moment if the Euro is going to sustain a meaningful rebound.

EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (September 2021 to September 2022) (CHART 1)

EUR/USD rates set a fresh yearly low yesterday before turning higher today. In doing so, the pair has completed the measured move of the April through July range at 0.9892. Provided the fundamental spark, EUR/USD rates are positioned for a short-term rebound. Bearish momentum is starting to fade, with the pair above its daily 5-, 8-, and 13-EMAs, even though the EMA envelope is aligned in bearish sequential order. Daily MACD is trending higher albeit below its signal line, while daily Slow Stochastics are trending higher towards their median line. A close above the daily 21-EMA (one-month moving average), which hasn’t happened since August 12, would offer greater confidence of a short-term bottom forming.

IG Client Sentiment Index: EUR/USD Rate Forecast (September 7, 2022) (Chart 2)

EUR/USD: Retail trader data shows 70.11% of traders are net-long with the ratio of traders long to short at 2.35 to 1. The number of traders net-long is 3.65% lower than yesterday and 4.92% higher from last week, while the number of traders net-short is 9.74% higher than yesterday and 12.43% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/USD prices may continue to fall.

Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD trading bias.

EUR/JPY RATE TECHNICAL ANALYSIS: DAILY CHART (September 2021 to September 2022) (CHART 3)

EUR/JPY rates broke out of the descending parallel channel carved out since the beginning of June in recent days, and on the back of significant Japanese Yen weakness, the pair has quickly raced back to its yearly high. Momentum is quickly improving, with EUR/JPY rates well-above their daily 5-, 8-, 13-, and 21-EMAs, with the EMA envelope in bullish sequential order. Daily MACD is trending higher above its signal line, while daily Slow Stochastics are holding in overbought territory. Hurdling 144.28 would suggest that the next leg higher has begun, following on the bullish breakout of the multi-decade descending trendline from the July 2008 and December 2014 highs.

IG Client Sentiment Index: EUR/JPY Rate Forecast (September 7, 2022) (Chart 4)

EUR/JPY: Retail trader data shows 29.90% of traders are net-long with the ratio of traders short to long at 2.34 to 1. The number of traders net-long is 3.33% higher than yesterday and 25.60% lower from last week, while the number of traders net-short is 2.46% lower than yesterday and 8.60% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/JPY 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/JPY trading bias.

EUR/GBP RATE TECHNICAL ANALYSIS: DAILY CHART (September 2021 to September 2022) (CHART 5)

Like EUR/JPY rates, EUR/GBP rates have surged higher as the British Pound’s problems have overshadowed the Euro’s dour situation. The pair broke out of the three-month descending parallel channel at the end of August and has found follow-through thus far in September. Momentum has strengthened, with EUR/GBP rates fully above their daily EMA envelope, which is in bullish sequential order, however. Daily MACD’s ascent above its signal line continues, while daily Slow Stochastics are holding in overbought territory. A breach of 0.8721 would suggest that a more sustainable bullish move is getting started.

IG Client Sentiment Index: EUR/GBP Rate Forecast (September 7, 2022) (Chart 6)

EUR/GBP: Retail trader data shows 34.74% of traders are net-long with the ratio of traders short to long at 1.88 to 1. The number of traders net-long is 12.67% lower than yesterday and 4.49% lower from last week, while the number of traders net-short is 0.42% higher than yesterday and 1.84% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/GBP 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/GBP-bullish contrarian trading bias.

— Written by Christopher Vecchio, CFA, Senior Strategist