EUR Longs Overextended

The latest CFTC COT institutional positioning data shows that EUR traders continued to add to longs in the week ending May 2nd. With this latest increase, EUR is the most overbought of the G10 pack. Indeed, despite longs being increased last week, price action shows a loss of upside momentum suggesting risks of a correction are growing. We’re already seeing EUR correcting lower in some parts of the FX market with EURJPY down around 2.5% from recent highs and EURAUD down by almost 4%. However, against the Dollar, EUR is yet to make a proper correction lower, though this might change in coming sessions.

US Rate Expectations in Focus

Friday’s jobs data showed the US economy remained more resilient than expected and with that, the prospect of a further hike in June remains alive. The market had initially moved to expect the Fed to remain on hold following the FOMC last week. However, with the Fed outlining a data dependent stance going forward, with a focus on jobs and inflation, a further hike might still be seen especially if tomorrow’s US CPI data comes in above forecasts. Stronger-than-forecast wages growth last month as well as a fall back in the unemployment rate raises the chance of tomorrow’s data showing a loss of momentum in the downward move we’ve seen in CPI recently. If this is the case, USD might well rally on an uptick in June rate hike expectations, leading EURUSD lower near-term.

Technical Views

EURUSD

The rally in EURUSD has stalled recently into the 1.1126 level which has capped price action over recent weeks. Bearish divergence in momentum studies flags the risks of a correction lower while this level holds above. The key support area to note is the 1.0785 level and channel lows which, if broken, open the way for a move down to the 1.0515 level next.