EUR/USD: Pullback risks mount as sentiment on dollar reaches bearish extremes

• EUR/USD is sidelined near 1.1775 ahead of the London open. 
• A pullback looks likely with sentiment around the US dollar at bearish extremes. 
• EU’s digital nationalism may add to bearish pressures around the euro.

EUR/USD may face some selling pressure this week as bearish sentiment on the US dollar has reached extremes at a time when the currency pair’s technical indicators are signaling overbought conditions. 

The US Commodity Futures Trading Commission data released on Friday showed the net bearish bets on the greenback rose for the fourth straight week to $24.27 billion – the highest since April 2018 – in the week ended July 28. 

• US dollar net shorts soar to highest in nine years

Such extreme market positioning is usually considered as a contrarian indicator by sentiment traders, the logic being that sentiment reaches extremes when investors are fully bullish/bearish in the market. 

Hence, the pair looks vulnerable to a pullback – more so, as widely-tracked indicators like slow stochastic and relative strength index are indicating that the rally is overdone. 

Concerns that European Union’s digital protectionism may anger Washington and Beijing could also add to bearish pressures around the single currency. France recently enacted Gafa tax (Google, Amazon, Facebook, and Apple) to strip revenue from the US digital platforms and advertisers and similar taxes are being prepared by Austria, the Czech Republic, Italy, Spain, and on an EU-wide basis, according to Financial Times. 

That said, the pair is unlikely to suffer big losses as the dollar-bearish factors that fueled the recent near-90 degree rally from 1.13 to 1.19 are still valid. Notably, the US Congress remains in a deadlock on how to extend a weekly boost to federal unemployment benefits that ended on Friday. 

EUR/USD is currently trading largely unchanged on the day near 1.1774, having hit a low of 1.1740 during the Asian trading hours. Apart from sentiment and technical indicators, trades may take cues from the US ISM Manufacturing data, scheduled for release at 14:00 GMT. The final German and Eurozone manufacturing PMI numbers for July may fail to move the needle on the EUR pairs unless they carry a significant upward or downward revision to preliminary figures released a few days ago. 

• EUR/USD Price Analysis: Eyes pullback after failure to beat macro trendline hurdle

Technical levels