The latest round of the commitment of trader reports from the CFTC last week revealed some strong positioning in EURO by the hedge funds.
Their net position change was up by 353.97% on the previous week.
In my books, that’s pretty big.
In this article I am going to dive into some key points:
Does this 300% rise in positioning matter?
Is EURUSD long still valid?
First, let us start with the Commitment of Trader reports. This report is something I monitor on a weekly basis, as I find it gives me an idea of what the large speculators are doing.
Does it make me want to blindly buy or sell a currency, commodity or stock market…no. But at the same time it has helped me keep on the right side of the market, more than not.
Anyway, breaking down this week’s EUR futures positioning, hedge funds did the following:
Long Contracts: +305
Short Contracts: -46,030
Net Contracts: +46,335
It is always important to look at the changes from both the long and short when observing the COT reports, because this gives us a sense of what’s actually happening.
But as we can see, they are getting long. They have reduced their short positions by a huge margin. In fact the net difference between long and short contracts in percentage change is +353.97%.
Which always leads me to a question…why?
Why do hedge funds or large speculators feel the need to reduce their short positions by such a margin?
In my opinion, it’s because of a few reasons.
EU Commission Stimulus: When Donald Trump re-entered the White House, he made it very evident that the US protects everybody else, but doesn't necessarily deserve it. He felt that the US unfairly contributed to NATO whilst other countries got off lightly. So one thing he did was go round and basically said, improve your own country's defence or we will apply some tariffs, possibly even leave NATO. Most countries went away and made plans to improve defence, including the UK, Canada and Europe. The problem in Europe was Germany. So what happened next came as a huge shock to the market. The EU commission announced a $800 billion fund to revive the defences of the EU to stop future potential threats, especially the threat from Russia. This big stimulus package could fuel growth across the EU especially in Germany, which is the largest economy within Europe.
Germany’s Revival: The German economy has been “in the bin” (my favourite saying), and I felt the final quarter of the year the EURO was overvalued vs the USD, and in the end that bore fruit. But this recent stimulus from the EU could now change things. Not only this, but just last week the German parliament passed a vote for $546 billion in extra funds to ramp up investment.
EU Yields Rallied: With all this stimulus going around, potential growth forecasts have risen and EU 10 year bond yields (Bunds) rose to their highest level since October 2023. This tells us that inflation expectations are higher, and bond traders think that we may see future rate hikes by the European Central Bank (ECB).
Is EUR/USD Long Still Valid?
I feel this is a question that comes with some risk, but in my opinion the answer is yes.
Please remember that this is not to be taken as financial advice, I am just giving my own opinion, please do your own research.
Let’s check out this chart of the difference between EU10Y and US10Y, which correlated strongly with EUR/USD prices.
EURUSD vs Yields
When the spread between the two bond yields rises, we often see flows into EUR/USD too. If they continue on their path higher, this will be a catalyst for me to be a buyer of EUR/USD in the near term.
Granted after such a meteoric rise we have to air a side of caution. The price can often pullback before it continues, and a lot of technical traders could confuse this with a change of trend or what not.
I will be looking for longs if the bond yields can remain above the 50 period moving average.
EURUSD Daily Chart
Taking this over to the EUR/USD chart, there’s three areas I like for long opportunities. The first is the closest and the most unlikely area to hold as support in my opinion. But none the less if buyers find support it could turn. That level is the 1.0767 lows formed by the 6th March daily candle. The reason being if this level breaks there is low volumes below, price can often trade quickly through these areas.
The second option would be my most ideal. This is the 1.0600 handle, as it is a strong level of resistance in the past. This also is the start of the high volume ledge. If the price forms a strong bullish reaction here, I like upside.
The third and final level of support for me is the 1.0500 zone, this is the resistance level before the strong breakout. Again, for me another strong area of support.
With potential reward, always comes risk.
On April 2nd, President Donald Trump plans to unveil tariffs, especially those on countries that have a trade surplus with the US. If this features heavy tariffs on Europe then the EUR/USD price could suffer in the short-term, which may lead to lower prices.
But the tariffs are an unknown at the moment, so until then, I still like EUR/USD longs for now.