Outlook for euro dollar exchange rate constrained to 1.33-1.38

Current levels in the euro dollar place the pair squarely within a range dictated to by speculative positioning in global FX.

The euro dollar exchange rate is trading on the front-foot on Monday; EUR/USD is quoted as being at 1.3510 in early afternoon in London.

PS: All quotations are taken from the wholesale inter-bank market. Your bank will affix a spread at their discretion when delivering you FX. However, an independent provider will seek to undercut your bank's offer, thus delivering up to 5% more currency. Please learn more here.

According to an analysis of non-commercial currency positions held at the CFTC by Lloyds Bank Research, the outlook for the euro dollar exchange rate is likely to be constrained by the positioning of non-commercial currency traders.

Net EUR long positions were reduced further in the week to November 12, and were no longer at significant levels.

So how does this impact the euro dollar exchange rate outlook? Lloyds Bank Research say:

"While net EUR longs may have edged back up in the last few days, they are likely to remain well short of recent highs, and a long way from being regarded as “extended”.

"Even so, the recent rhetoric from the ECB is discouraging EUR longs by emphasising the scope for further ECB easing in the event of inflation falling further, so in spite of some indications from yields spreads of modest EUR upside potential, it looks hard for EUR/USD to come back to test recent highs.

"Conversely, it will require a much more positive view of the US and the return of imminent tapering expectations (at a minimum) to threaten a breach of recent EUR/USD lows. So for the moment, it is hard to see a trigger for a break of the 1.33-1.38 range in EUR/USD this year."

How CFTC positioning works and its impact on FX

Traders are classified as either commercial or non-commercial.

The positioning of the non-commercial traders can be used as a proxy for the speculative side of the market.

Extreme net long or net short positions are taken as an indication of the market’s vulnerability to a sharp reversal and are identified by the interpretation of positioning ‘percentile’ vs historical norms.

For a squeeze to occur from a stretched long/short position, however, a separate catalyst such as fundamental news or a breach of a key technical level is usually required.