EURUSD Shifts from Reversal to Range, Market Interest Growing While SPX Ebbs

EURUSD, Range, Futures, Open Interest and Sentiment Talking Points:

There has been some significant technical activity from EURUSD this past week. With event risk ranging from the Fed and ECB rate decisions to the NFPs and ISM service sector ‘beats’, there was much to mull for traders behind the world‘s most liquid exchange rate. Yet, for all the event risk behind us; there has been little-to-no material to cross the headlines this week. With interest rate expectations for the Fed leveling out (and the market uncertain about the ECB) while growth forecasts slip into the background of fundamental noise, there isn’t a particularly strong and public driver for this exchange rate. When we lack of a clear and active theme, it can curb momentum. When scheduled event risk is thin, it can further deflate volatility. This mix may change next week when the US CPI roles around (Tuesday); but for the time being, congestion looks to be a more reasonable pace for EURUSD. A proper account of the technicals and activity we would adapt to warrant a downgrade in time frames. Below is a four-hour chart of the pair which more distinctly highlights the fairly volatile inverse head and shoulders pattern carved out of the past few trading days. The ‘neckline’ is roughly 1.0765, the ‘shoulders’ are around 1.0710 and the ‘head’ trough establishes a third point of a trendline starting with the low of November 21st at 1.0670.

Reflecting on the speculative proclivities of the active market participants here, there is likely a boost in the influence of smaller ‘traders’ versus larger ‘investors’ (banks, funds, etc) owing to the lack of critical development in underlying matters such as interest rate differentials. That skew in participation would lead to shift in the way the market develops. Retail and other smaller players tend to have shorter time frames by nature and are far more likely to follow chart patterns. That often manifests in a preference for range. We can see that skew in the retail trading (at IG) through EURUSD below. When the pair reversed last week and continued through a break of its rising channel, the rank significantly reduced its short exposure rather than ride the turn in trend. Meanwhile, bullish interest was drawn in, leaning against the charged slide. We often consider retail positioning as a contrarian indicator due to a combination of factors (lack of experience, short time frame, leverage, etc), but it is not always out of step. If markets are congestion-prone, then the natural activities of this group will tend to align.

Change in

Longs

Shorts

OI

Daily

10%

10%

10%

Weekly

79%

-41%

-7%

What does it mean for price action？

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From the short-term interests of retail traders to the very long-term perspective of the EURUSD itself, I want to highlight an interesting development behind the benchmark pair. While there may be some technical (eg coming off a multi-decade low) and fundamental (eg diversifying from the Greenback) factors playing into this observation, it is independently remarkable that there has been a steady build up in open interest behind Euro FX futures over the years to recent record highs. While there may be a different backdrop for spot and leveraged accounts relative to this particular derivative type, it is large enough in scale to be representative of general market interest. What makes this even more remarkable is the contrast to the exposure to the S&P 500 e-mini futures, which is considered one of the most heavily traded market contracts in the world. For the benchmark index, emini open interest is near its lowest since 2008. Is that a reflection on trend prospect, view on volatility expectations or perhaps there is a shift in asset type (such as from futures to ETFs)？ It is hard to tell. That said, it is a big picture trend worth monitoring.

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