EUR/USD: Polarity principle points to plunging prices

The world’s most widely-followed currency pair is reacting well to one of the most widely-followed technical principles: Polarity.

For the uninitiated, the polarity principle refers to the tendency for former support levels, or floors under price, to turn into future resistance levels, or ceilings on price, once they’re broken (and vice versa). From a psychological perspective, a break beyond an established level of support or resistance represents a significant shift in market sentiment, and when traders see an opportunity to re-enter near the breakout level, they often seize it, creating the requisite demand/supply that allows the polarity principle to exist.

In this case, EUR/USD broke through support near 1.1125 at the start of the month, eventually falling all the way down to 1.0800 before bouncing back to retest previous-support-turned-resistance at 1.1125 on two occasions. Not surprisingly, that same level served as resistance on the rallies and the pair has since fallen down to break below its near-term bullish trend line this week (which itself has since served as a level of resistance on this week’s minor bounce):

Source: TradingView, StoneX

Moving forward, both the 50- and 200-period EMAs on the 4-hour chart are trending lower, suggesting that the medium-term bias remains to the downside. At this point, the odds favor a retest of the 1.0800 level in the coming weeks, especially with the Federal Reserve laying out a meaningfully more aggressive plan to raise interest rates over the course of this year.

Bearish-inclined traders may want to consider sell opportunities near current levels with a protective stop above the key 1.1125 level and a potential target above previous support near 1.0800. Only a sustained break back above 1.1125 would erase the near-term bearish bias and open the door for a more extended rally from here.

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