Bullish Breakout Attempts Starting in EUR/JPY, EUR/USD Rates

Euro Forecast Overview:

  • EUR/JPY rates have rallied to fresh yearly highs, while EUR/USD rates are racing towards the yearly high set earlier in December.
  • Recent shifts in short-term fundamentals have resolved several issues plaguing the Euro in recent months.
  • Per the IG Client Sentiment Index, the Euro has a mixed bias in the short-term.

Euro’s Bull Run Ready to Resume?

The Euro is back on the up-and-up across the major currencies covered by DailyFX Research, perhaps thanks to key issues finding resolution before the end of 2020. In recent days, the US fiscal stimulus deal has been signed into law and a Brexit deal has been reached between the EU and UK. Increased US fiscal deficits against the backdrop of the Federal Reserve’s low interest rates have plagued the US Dollar, as depressed US real yields have driven investors away from the greenback. Avoiding a ‘no deal, hard Brexit’ prevents an unintended economic shock that would obviously ripple from the UK into the EU.

We can’t forget about the coronavirus vaccine approvals either, which have been a shot in the arm to risk appetite. All in all, these have been positive, near-term fundamental developments for the Euro. Traders may be readying to take positions in the two major EUR-crosses ahead of the New Year, as EUR/JPY rates have rallied to fresh yearly highs, while EUR/USD rates are racing towards the yearly high set earlier in December.

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EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (December 2019 to December 2020) (CHART 1)

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EUR/USD rates are showcasing their bullish technical posture in real time, having warded off a return to the bull flag carved out in the first two-plus weeks of December. Contextually, this has followed the bullish breakout above sideways range resistance in place since late-June. It still holds that “final targets for a simple doubling of the broader range dating back to late-June would suggest gains through 1.2600 in the coming months.” Breaking the December high at 1.2273 would be a strong indication that bullish continuation is in process.

Bullish momentum is increasing, with EUR/USD rates above their daily 5-, 8-, 13-, and 21-EMA envelope. Daily Slow Stochastics have turned higher above their median line, while daily MACD is starting to trend higher once more above its signal line. Amid more losses for the DXY Index, the path of least resistance for EUR/USD appears to be to the topside once again.

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IG Client Sentiment Index: EUR/USD Rate Forecast (December 29, 2020) (Chart 2)

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EUR/USD: Retail trader data shows 31.46% of traders are net-long with the ratio of traders short to long at 2.18 to 1. The number of traders net-long is 8.94% lower than yesterday and 1.76% higher from last week, while the number of traders net-short is 11.62% higher than yesterday and 1.48% 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.

Positioning is more net-short than yesterday but less net-short 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 (December 2019 to December 2020) (CHART 3)

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With respect to EUR/JPY rates, it’s recently been noted that “the more near-term range carved out thus far in December between 125.79 and 126.74 (95-pips) suggests an immediate upside target of 127.69…longer-term, it is still the case that a bullish breakout to fresh yearly highs above 127.08 would be a material accomplishment, one that would warrant a longer-term bullish outlook for EUR/JPY rates.”

With fresh yearly highs established today, EUR/JPY rates are now making a decisive attempt at breaking above the ascending trendline from the July 2012 and June 2016 lows, a trendline that has previously capped previous rallies dating back to September 2020. If price action has proved to be an ascending triangle since the May low, then it would be the case that EUR/JPY rates may have several hundreds of pips to the topside in terms of potential heading into 1Q’21.

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IG Client Sentiment Index: EUR/JPY Rate Forecast (December 29, 2020) (Chart 4)

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EUR/JPY: Retail trader data shows 34.43% of traders are net-long with the ratio of traders short to long at 1.90 to 1. The number of traders net-long is 33.33% higher than yesterday and 19.82% higher from last week, while the number of traders net-short is 15.62% higher than yesterday and 2.78% higher 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.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/JPY price trend may soon reverse lower despite the fact traders remain net-short.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

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