EURUSD: Fundamentals and Technicals Bearish, but What Does Sentiment Say?

One of the most hotly-contested concepts in the trading world is the (false) dichotomy between fundamental and technical analysis. Fundamentalists argue that technicians are trying to “read the tea leaves” of squiggly lines on a chart, whereas technicians say that all the fundamental data is priced into the market or too unpredictable to trade. However, in a strange sort of truce, both fundamental and technical traders are in agreement on the EURUSD right now, though rarely-talked-about sentiment traders are starting to ring the alarm bells.

Fundamentals: ZEW = EW!

Earlier today, traders got their first glance at the German ZEW survey for the month of August, and it wasn’t pretty. The index came out at just 8.6 vs. a consensus forecast of 18.2, marking the eighth consecutive weaker-than-expected reading from this leading economic indicator. The figure has shed over 50 points from its high of 62 at the beginning of the year, and is now at risk of turning negative for the first time since 2012. The ZEW survey adds to the string of poor economic reports out Germany, which is typically seen as the engine of Eurozone economic growth. If the German economy continues to stutter, the ECB may have no choice but to institute outright QE sooner rather than later.

Technicals: Price Action is King

As you might expect after a string of weak economic reports, the EURUSD’s chart is also painting a bearish picture. The unit continues to put in lower lows and lower highs on the daily chart, the textbook definition of a downtrend, while both the 50- and 200-day MAs are trending lower. At the same time, the MACD indicator is mired well below the “0” level, showing strong selling momentum. The only potential concern from a technical standpoint is the potential divergence developing in the RSI indicator, which failed to confirm last week’s low in price. That said, the preponderance of technical evidence suggests that EURUSD should remain under pressure in the days to come and that bears may look to target the 1-year low around 1.3300 next.

Sentiment: Positioning Data Reaching an Extreme

While fundamental and technical traders duke it out on a daily basis, sentiment traders typically only throw their hats into the ring when markets are reaching an extreme. Based on the most recent Commitment of Trader report from the CFTC, traders extremely pessimistic on the Euro’s prospects:

“Commercial traders,” shown in red above, are typically large companies trying to hedge their currency risk, and as a result, they are not interested in making money trading. For this reason, the large (green) and small (blue) speculators give the most reliable indication of how active, profit-driven traders are positioned. Both of these subsets are positioned at multi-year bearish extremes: Large speculators are net short to the tune of nearly 125k contracts, whereas small speculators are short nearly 50k contracts. Both of these readings are the most extreme since mid-2012 and the overall ratio of sellers to buyers is approximately 4:1.

This extreme bearish positioning shows that many traders are already short EURUSD; from a contrarian perspective, this phenomenon could actually indicate that there soon may be “no one left to sell,” even if the fundamental and technical outlooks continue to deteriorate.

While we still generally favor sell opportunities in EURUSD, bearish traders should still keep a close eye on the market’s reaction to news announcements over the next few weeks. If EURUSD stops selling off and begins to hold steady (or even rally) on poor economic data, it would indicate that a near-term extreme has been reached and the pair may be due for a recovery rally toward at least 1.3500.