EUR/USD: Bearish Pattern Projects Possible Near-Term Top at 1.3860, 1.3680

Since reaching a nadir below 1.3800 on Tuesday, the EUR/USD has stubbornly rallied back to the week’s highs as traders try to “call the bluff” of the ECB. As my colleague Kathleen Brooks outlined earlier today, the ECB has grown increasing vocal about the euro’s rise, arguing that the strong currency is hurting exporters and driving down inflation. Despite the persistent jawboning, the market’s reaction over the past 48 hours is a clear indication that ECB actions would speak much louder than words.

While the EUR/USD’s fundamental situation will undoubtedly be worth watching moving forward, the most interesting developments over the rest of the week may come from the technical realm. As we go to press, the EUR/USD is currently pulling back from the completion of a bearish Gartley pattern on the 1hr chart. For readers who are not familiar, a bullish Gartley pattern is created by two approximately equal swings higher (the “AB” and “CD” legs) into a confluence of Fibonacci resistance levels.

In this case, initial pattern completion comes at 1.3860 (Point D1 at the convergence of the AB=CD pattern, 61.8% retracement of XA, and the 127.2% extension of BC) with potential secondary pattern completion at 1.3880 (Point D2, where the 127.2% ABCD extension, 78.6% XA retracement and 161.8% BC extension all converge). Astute readers will also note that the initial pattern completion comes at the weekly highs set on Sunday/Monday, while secondary pattern completion would represent a “fill” of the bearish weekend gap.

In addition to the geometric price pattern, the Slow Stochastics indicator has also reached overbought territory above 80. While it’s impossible to state conclusively, there is a possibility that the weekly high has already emerged on the initial test of the 1.3860 level. Even if this barrier is eclipsed, secondary pattern completion at 1.3880 may well provide a ceiling heading into next week. If both of these levels are broken, bulls may try to test the ECB’s resolve by pushing the pair up to the 1-month high near the 1.3900 handle or the 2.5-year high at 1.3970 next week.