From the volatility point of view, the EUR/USD was not characterized by large volatility in prices, which did not prevent the systematic depreciation of the single currency against the US dollar. As a result, on the wave of disappointing economic data and the slight chance of interest rate hikes by the European Central Bank euro has dropped to a two-year low.
At a time when the euro was losing its value, institutional investors with a speculative approach to the market (non-commercial investors) increased their short positions on the futures contracts against the euro. Short positions allow to take advantage of market opportunities when the value of the underlying instrument decreases, in this case the euro exchange rate expressed in dollar. And so from April 2018, the number of short positions among non-commercial investors increased from 86 thousand contracts up to almost 260,000 at the beginning of May. It means tripling the "bets" on the drop in the value of the euro.
The said level of 260,000 contracts opened for a decline in the value of the euro in historical terms is relatively high. The last time it was observed in 2012, 2015 and 2016.
Chart: Non-commercial investor short positions on euro. Source: tradingster.com
At that time, these were limit values, after which the investors reduced their expectations for the EUR/USD rate drop. Of course, the story does not have to be repeated, but it is worth noting that in the significant oversold conditions and in the absence of a further significant decline in the currency pair's rate this may be an indication of the near end of the trend.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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