Talking points on the EURUSD, range, futures, open interest, and sentiment:
Behind the most liquid exchange rate in the world, traders had a lot to think about due to event risk, which included anything from the Fed and ECB rate decisions to the NFPs and ISM service sector ‘beats’. Despite this, there hasn’t been much news this week despite the event danger being behind us. There isn’t a particularly strong and visible driver for this exchange rate since interest rate expectations for the Fed are leveling down (and the market is unsure about the ECB), while growth estimates fade into the backdrop of underlying noise. Lack of a distinct and engaging subject might slow down progress. The risk of a scheduled event being low might further reduce volatility. When the US CPI comes out (on Tuesday), this mixture may alter, but for the time being, congestion appears to be a more manageable pace for the EURUSD. The “neckline” is around 1.0765, the “shoulders” are approximately 1.0710, and the “head” trough provides a third point of a trendline beginning with the low of November 21st at 1.0670.
When considering the speculative tendencies of the active market players, it is likely that smaller “traders” have more effect than bigger “investors” (banks, funds, etc.) because important developments in underlying issues like interest rate differentials have not occurred. Retail and other minor businesses are far more inclined to follow chart patterns and have shorter time horizons by nature. Instead of riding the trend change when the pair reversed last week and persisted through a breach in its ascending channel, the rank drastically cut its short exposure. Bullish interest was also piqued, supporting the heated decline. Due to a number of characteristics (lack of expertise, short time horizon, leverage, etc.), we frequently view retail positioning as a contrarian indication, although it is not necessarily out of step. The natural behaviors of this group will tend to align if markets are congested.
I want to draw attention to an intriguing development that has been happening behind the scenes of the benchmark pair, from the short-term objectives of retail traders to the extremely long-term outlook of the EURUSD itself. While some technical (such as coming off a multi-decade low) and fundamental (such as diversifying away from the Greenback) reasons may be at play in this finding, it is nonetheless amazing that open interest in Euro FX futures has steadily increased over the years to current record highs. This particular derivative type may have a distinct background for spot and leveraged accounts, but it is significant enough in scale to be emblematic of overall market interest. The exposure to the S&P 500 e-mini futures, which is regarded as one of the most actively traded market contracts in the world, makes this even more astounding. Emini open interest for the benchmark index is almost at its lowest level since 2008. Does that indicate a potential trend, a perspective on volatility expectations, or possibly a change in the sort of asset (such as moving from futures to ETFs)? Nevertheless, it is a broad trend that should be watched.