You may have seen a couple of tweets from us on the EUR/USD currency pair, highlighting the false breakout above the 1.1040 handle earlier today. As this could turn out to be a significant reversal in the trend, we thought we should send out a quick note with a chart to put some more colour behind this potentially bearish setup. My colleague Neal Gilbert has already covered the fundamental drivers of the USD in his USD/CAD piece which you can find here, so won’t repeat them. But one thing I would like to mention is that the divergence of monetary policies between the US and euro zone central bank means that we are fundamentally bearish on the EUR/USD. Will today mark the resumption of the EUR/USD’s downward trend?
As can be seen on the chart, below, the EUR/USD rallied to a high of 1.1050 earlier today. As a result, it probably took out some stop loss orders from the weaker hands above Wednesday’s post-FOMC high of 1.1040. As the bulls lacked conviction to increase their bets at that extreme, the EUR/USD could not hold its own there. Sensing blood, the bears returned en masse which caused price to drop viciously. So far it has dropped almost 150 pips to a low of just over 1.0900.
But there could be more losses should this 1.0900 support level also breaks down. If seen, it may give rise to further follow-up technical selling towards the next logical support at 1.0825 which is the 38.2% Fibonacci retracement level of the recent upswing. But the sell-off could potentially extend far beyond that level.
However if the buyers hold their ground at these levels and eventually cause the EUR/USD to push back towards 1.1040 and beyond, then the next key resistance area to watch would be around 1.1110/25. This is where the broken support level meets the 61.8% Fibonacci retracement of the last leg down, so it is a significant area of resistance. But as things stand, the EUR/USD looks more likely to extend its declines than to stage a rally from here.
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