Euro Technical Analysis: EUR/GBP, EUR/JPY, and EUR/USD Narrative Formation

Euro PERSPECTIVE

• Euro strength is gaining traction across the key EUR-crosses as the Russian invasion of Ukraine appears to be drawing to a close.

• A ceasefire would enable the European Central Bank to act more aggressively on interest rates in order to contain inflation pressures, hence reducing the rate disparity between the ECB and other major central banks.

THE SHAPE OF THE NARRATIVE

The Euro has been strengthening in recent days on fears that Russia's invasion of Ukraine is nearing an end. As negotiations toward a ceasefire advance, the metaphorical toothpaste is being reintroduced: no more disruptions to commodities supply chains; no more funding strains in financial markets; and no more uncertainty about economic impact.

Against this backdrop of receding fears, traders have begun positioning themselves as if the European Central Bank will face little uncertainty as it prepares to withdraw stimulus and tighten monetary policy later this year. Indeed, if the Russo-Ukrainian war ends, it stands to reason that the ECB will act more quickly to contain inflation pressures than the market had anticipated before to this week. Rate differentials, which previously favored a weaker Euro against the British Pound and the US Dollar, have begun to shift back in favor of the Euro.

TECHNICAL ANALYSIS OF THE EUR/USD RATE: DAILY CHART

EUR/USD prices have risen over 1.1120, a previous support level in a sideways range that spanned January and February. Thus, a significant bottom may have formed following the pair's brief dip to the ascending trendline connecting the 2000 and 2017 lows. Resistance has already been breached, with EUR/USD rates trading above the descending trendline drawn from the swing highs in May 2021, September 2021, and January 2022. In EUR/USD rates, a 'buy the drop' approach may be suitable as long as the pair remains over 1.1120.

FORECAST OF THE EUR/USD RATE

EUR/USD: Retail trader data indicates that 55.18 percent of traders are net long, with a long-to-short ratio of 1.23 to 1. The net-long position of traders is down 9.01 percent from yesterday and 15.82 percent from last week, while the net-short position of traders is up 10.49 percent from yesterday and 2.22 percent from last week.

We normally take a contrarian position on crowd mood, and the fact that traders are net long EUR/USD signals that prices may continue to fall.

Nonetheless, traders are less net long today than they were yesterday and last week. Recent attitude shifts suggest that the EUR/USD price trend may shortly reverse higher, despite the fact that traders remain net long.

TECHNICAL ANALYSIS OF THE EUR/JPY RATE

EUR/JPY rates surpassed the January 2018 high of 137.51 in recent days. It stands to reason that last week's observation that "the multi-month bull flag that formed following the break above the descending trendline connecting the July 2008 and December 2014 highs has finally yielded a topside move that points to further strength in the weeks and months ahead" is accurate. Additionally, "a rebound to the flag breakthrough level near 132.80 is not ruled out; buying the dips is the preferable approach going forward."