EUR/USD Price Outlook Remains Biased to the Downside as Euro Weakness Continues

Federal Reserve chair Jerome Powell may have given a slightly dovish outlook at yesterday’s FOMC meeting but the closely watched US Treasury market is seemingly ignoring his ‘looser for longer’ rhetoric. The yield on the benchmark UST 10-year touched 1.74% early today, up around 9 bps, while the UST 2/10-year spread (inverted) steepened to 160 basis points, its widest level since 2015. And more importantly for EUR/USD, the spread between the 10-year German Bund – the de-facto EU benchmark – and the UST 10-year is now a full 2 big figures or 200 basis points. If this spread remains, or widens further, EUR/USD will come under renewed downside pressure.

The ongoing spread of the coronavirus in Europe continues to weigh on the single currency and this may increase if a mooted third lockdown in parts of Europe becomes reality. German covid-19 cases are growing ‘exponentially’ according to the countries Robert Koch Institute, France recorded just over 38k new cases on Wednesday, while Poland hit a 2021 high in new infections prompting the government to impose a new three-week partial lockdown. The EU will remain at risk of new partial or full lockdowns until the heavily criticized vaccination program turns a corner and begins vaccinating people in their millions a day.

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The daily chart shows the pair now trapped between the 20-day SMA (resistance) and the 200-day sma (support). This bearish outlook will be confirmed if the pair make another break and open below the 200-day sma, leaving the recent multi-month low at 1.1832 as the next downside target. The 20-day sma at 1.1990 guards the upside.

EUR/USD DAILY PRICE CHART (JULY 2020 – MARCH 18, 2021)

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IG Retail trader data show 44.07% of traders are net-long with the ratio of traders short to long at 1.27 to 1. 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 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/USD trading bias.

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