EUR/USD Testing "Make-or-Break" Level Near 1.3800

After plumbing new 5-week lows in the wake of Friday’s Non-Farm Payrolls report, the EUR/USD has rallied strongly back thus far this week. The recovery hasn’t been driven by any specific news announcement, but rather broad-based weakness in the U.S. Dollar. As such, the move may be vulnerable to reverse unless a true bullish EUR or bearish USD catalyst emerges.

The technical picture, meanwhile, indicates that rates are currently trading at a critical near-term resistance level. As the 4hr chart below shows, rates are testing the top of a 1-month bearish channel near 1.3775. In addition to the channel, horizontal resistance may also emerge near the 38.2% Fibonacci retracement of the recent drop at 1.3784. The confluence of two distinct resistance levels in the upper-1.3700s increases the likelihood of a near-term top forming ahead of the 1.3800 handle.

Furthermore, two other styles of technical analysis are also raising yellow flags. Firstly, the Slow Stochastics are trading well into overbought territory; on the indicator’s three previous forays above 80, a near-term top emerged relatively quickly (see green circles on the chart), though of course that’s no guarantee of a top forming in this instance.

While much of technical analysis can be overwhelming for newer traders (perhaps including the above comments!), the final bearish technical indication is relatively straightforward. Over the last four weeks, the EUR/USD’s rallies appear to have formed a bit of a “threshold” for movement at 100-130 pips. As the chart highlights, each of the last four rallies have come to an end in that general range. This rudimentary analysis doesn’t mean that the EUR/USD absolutely cannot move higher from here; rather, it suggests that a continued rally from here would represent a change in the “character” of the market and a likely continuation higher over the course of the week.

A bullish breakout could target last week’s high at 1.3820, followed by the 61.8% Fibonacci retracement at 1.3850 next, whereas a bearish reversal may open the door for a move back toward the middle of the channel near 1.3700.

Key Economic Data / Events That May Affect EUR/USD This Week (all time GMT):

Ø Tuesday: US JOLTS Job Openings (14:00), FOMC Member Kocherlakota Speech (17:30), FOMC Member Plosser Speech (18:45)

Ø Wednesday: German Trade Balance (6:00), FOMC Meeting Minutes (18:00), FOMC Member Tarullo Speech (23:00)

Ø Thursday: ECB Monthly Bulletin (8:00), US Initial Unemployment Claims (12:30), US Federal Budget Balance (18:00)

Ø Friday: US PPI (12:30), US UofM Consumer Sentiment (13:55)