EUR/USD on the verge of another breakdown

The EUR/USD is on the verge of taking another leg lower, a day before the European Central Bank meeting. Although not much will be expected from this particular meeting, the focus will be on how the ECB will achieve the €60 billion a month of the QE stimulus programme it is planning to launch this month. Mario Draghi could put the final nail in the coffin for the euro if he sounds decidedly dovish at his press conference and does not acknowledge the recent upturn in Eurozone data. The world’s most heavily traded currency pair started today’s session on the back foot after the latest PMI numbers from Spain and Italy missed expectations, which ended a run of decent Eurozone data we have been accustomed to of late. The final estimate for the Eurozone services PMI was also revised down a touch to 53.7 from 53.9. However we then had a really good retail sales figure out of the Eurozone which showed a 1.1% month-over-month increase for January. It easily beat expectations of a meagre 0.2% increase, while the prior month was revised higher a touch, to 0.4% from 0.3%. This caused the EUR/USD to pause just ahead of the 1.11 handle and thus prevented it from hitting a fresh 12-year low. However the growing divergence between the US and Eurozone monetary policies means the EUR/USD could drop to fresh lows soon. On top of this, there will be some key US data out later this afternoon – the ADP February employment report and ISM’s non-manufacturing PMI– and then the all-important nonfarm payrolls numbers on Friday. So, even if the euro does not weaken further, the dollar – data permitting – could certainly strengthen this week and therefore weigh on the EUR/USD currency pair.

As a result of the selling pressure, the bearish setup on the EUR/USD is looking more constructive. As can be seen on the 4-hour chart, following the ECB’s announcement of QE on January 22, the EUR/USD broke out of a triangle pattern before going on to break several support levels. Such was the strength of the move that price eventually reached the most exhaustive price target seemingly possible: the 261.8% Fibonacci extension level of the up move prior to that ECB meeting from point A to B , at around 1.1100 (point C). As a side note, this is also roughly where the long-term 61.8% Fibonacci support comes into play, so it is a very important technical level indeed. Unsurprisingly therefore, the EUR/USD went on to stage a sharp short-covering rally from that exhaustive level, which eventually faded at 1.1533 (point D). The euro then went on to consolidate inside a larger triangle pattern for most of February, before eventually breaking lower once more. As a result, it has taken out the key 1.1300 support level, causing price to fall back to near the 12-year low of 1.1100.

Now, while the possibility for a double bottom reversal pattern is here, we think the chances are slim for the reasons stated above. Indeed, a decisive break below 1.1095/1.1100 could lead to fresh technical selling towards the psychological 1.1000 initially. Thereafter, the next bearish targets are at 1.0975/80 and then 1.10825/30. These are the 127.2 and 161.8 per cent extension levels of the move up from point C to D. Meanwhile the key resistance level to watch is at 1.1160, the base of a small triangle pattern that was broken earlier today. Beyond that is 1.1200, 1.1250 and then 1.1300. But given the circumstance, the bulls would do very well to push the price that high.