EUR USD selling could be short lived

The EUR/USD has started this week how it ended the last one: lower. Thanks to some mildly positive US economic numbers at the end of last week and the Fed’s insistence for a 2015 lift off, the dollar has found some support. The euro meanwhile has been weighed down by speculation about the possibility that the ECB may beef up its bond-buying programme if inflation weakens further. Unfortunately, there are not much data scheduled for release today to alter these views significantly, so Fed speeches from Brainard (at 15:00 BST) and Lacker (at 17:00) will be monitored closely. The only exception to an otherwise data-void day is the NAHB Housing Market Index, which is due at 15:00 BST and expected to have remained unchanged at 62 in October. Looking ahead, there will be more US housing market indicators and Fed speeches later this week, starting on Tuesday with the release of building permits and housing starts, and speeches by Dudley, Powell and Yellen. From the Eurozone, the ECB’s policy meeting will conclude on Thursday with the press conference likely to be the focal event, while on the data front there won’t be much in the way of key macro pointers until Friday when the latest Flash Manufacturing and Services sector PMIs will be released from France, Germany and the Eurozone.

Given the recent deterioration in US data, the Fed may become a bit more vocal in talking down the possibility of a December lift off which could put the dollar under renewed selling pressure.  Meanwhile, the ECB President Mario Draghi may deliver a more upbeat outlook on the Eurozone economy and dismiss the prospects of expanding QE on grounds that it is probably too early to judge whether the stimulus is working as desired. As a result, the EUR/USD may find some support after shedding almost 200 pips from its high last week.

Technical outlook: EUR/USD

As we reported the possibility on Thursday, the EUR/USD’s advance at a major technical area, namely between 1.1416 and the psychologically-important 1.1500 handle, was rejected. As well as a bearish trend line that stretches back to the May 2014 high, this region had previously been a key area of interest for the sellers and it proved to be the case this time too.  As a result of the renewed selling here, the EUR/USD has formed an inverse hammer candle on its weekly and a bearish engulfing candle on its daily chart, patterns which usually precede further weakness. Indeed, we have already seen some follow-through in the selling pressure at the start of this week despite the lack of any fresh macro stimulus.

However it should be noted that the sellers’ efforts have progressively become less effective in recent times on the EUR/USD, as highlighted for example by the most recent, albeit short-lived, breakout above 1.15 that saw price momentarily surpass the 1.17 handle. Since that potentially false breakout reversal pattern, the bulls have been able to successfully defend their ground, causing price to create higher lows. As a result, an accelerating bullish trend within a larger bear flag pattern has now been established.  The lower highs suggest that the long term bearish trend may be weakening and that a decisive break higher could be on the cards soon. The bulls will also point to the recent crossover of the 50-day average above the 200 as a further confirmation (see the daily chart).

So, this recent downward move in the EUR/USD may again prove to be short-lived, which is why it is imperative to watch the key support levels closely. One such level is around 1.1300/15. This formerly resistance level was being tested at the time of this writing, so by the time you read this report, there is a chance you may find the EUR/USD at a higher price level. Below here, 1.1250 could be the next key support to watch, a level which corresponds with the convergence of the 50-day moving average and a short-term bullish trend line.

In the short term, we will therefore remain cautiously bullish on the EUR/USD until and unless it breaks decisively below the abovementioned bullish trend line. If this happens, the bears may then aim for 1.1220 as their initial target, with a slightly longer-term bullish trend line coming in slightly below this level.

Meanwhile, if the EUR/USD breaks above 1.1500 then bulls may initially target the August 2015 high of 1.1710 ahead of possibly the 38.2% Fibonacci retracement level at 1.1810 next. Depending on the speed of the potential rally, at around these or the next psychological level of 1.20 resides the upper trend of what looks like to be a bearish flag pattern. Thus, the upside could be capped around those levels before we possibly see the resumption of the long-term downward trend.