EURUSD: Quietly Carving Out a Near-Term Bottom?

It’s been a rough couple of months for EURUSD bulls. It seems like only yesterday when the world’s most widely-traded currency pair was knocking on the door of 1.40 and bulls assumed that the good times were here to stay. Flash forward four months: the pair has collapsed to nearly 1.28, a drop of almost 1,200 pips, and it has closed lower in 9 of the past 10 weeks. While traders should always be cautious when trying to “catch a falling knife”, or pick a bottom in a collapsing market, there are some nascent signs of a potential near-term bottom forming in EURUSD.

From a purely fundamental perspective, today’s Eurozone data was not particularly encouraging for bulls. The best way to describe the Eurozone PMI reports would be mixed, with Germany beating expectations on its Services PMI report, but missing on Manufacturing, while France beat on Manufacturing but missed on Services. Taken as a whole, the Eurozone Manufacturing activity has eked out a small gain so far this month, in-line with expectations, while Eurozone Services activity disappointed slightly at just 52.8 vs. 53.2 eyed.

Despite this uninspiring data, EURUSD managed a modest rally in today’s early European trade. As we repeatedly note in these columns, a failure to selloff further on weak economic data is often a reliable sign of a seller’s exhaustion and a short-term turn higher. Looking to the 4hr chart reinforces the potential for a bullish turn this week. Most prominently, rates have put in a rare quintuple bullish divergence with the RSI, meaning that the indicator has put in higher lows on each of the last five lower lows in price. This phenomenon indicates a persistent decline in selling pressure and often precedes significant bottoms in the market. The MACD has also turned higher and may soon cross above its 0 level, heralding a shift back to bullish momentum.

In the short term, more conservative EURUSD bulls may want to wait to see if rates can break above the 1-month bearish trend line (currently around 1.2915) before looking to buy. If that barrier is cleared, a continuation to the 20-day MA around 1.2985 or the 1.3000 round handle could be seen next. That said, a bearish reversal off trend line resistance would suggest that the pair may return back to yesterday’s low at 1.2815 or longer-term support at 1.2800 before forming any sort of meaningful bounce.