US Dollar Wrecking Ball Slams Euro To Support

USD, EUR/USD Analysis and Talking Points

• USD strength weighs on counterparts
• Euro tests support ahead of expected 75bps ECB hike

The US Dollar has been a wrecking ball for FX markets as the upside in the greenback persists with little signs of momentum slowing. However, with the latest US CPI just around the corner, I would be cautious in chasing this upside. The bias would be to fade dips in the US Dollar. Elsewhere, USD/JPY broke above 144.00 and while I noted that the door was open to 145 for bulls, I was not expecting that to take place within the subsequent 24 hours, which suggests to me that FOMO may have exacerbated recent momentum. That said, in the short-run, USD/JPY is starting to look overbought, but what will ultimately change the direction of the pair is a change in view from Governor Kuroda.

The Euro hovers around support at the 0.99 handle, and while we have seen a break below, we have yet to see a close below. However, while the ECB is gearing up towards a 75bps hike at tomorrow’s meeting, the language used will be key as to whether the Euro can find a floor, for example stating a willingness to move into restrictive territory as opposed to simply front-loading policy to play catch up. If the latter is the case, I would expect any spikes higher in the Euro to be faded with a firm break below 0.9900, which would raise the risk of a move to 0.96.

EUR/USD Chart: 4-Hourly Time Frame

Source: IG

IG Client Sentiment Signals Bearish EUR/USD Bias

Data shows 72.64% of traders are net-long with the ratio of traders long to short at 2.65 to 1. The number of traders net-long is 7.57% higher than yesterday and 14.38% higher from last week, while the number of traders net-short is 15.92% lower than yesterday and 24.62% 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.

Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/USD-bearish contrarian trading bias.