Technical and Fundamental Changes in One Short Week
A lot happened in the holiday-shortened week that just past, here is a summary.
EUR/USD has fallen below several moving averages. On a daily chart, it now trades below the 200, 100 and 50-day MA’s. On a weekly chart, it’s back below the 200 moving average.
Also on a weekly chart, the pair has posted an evening star reversal candlestick pattern as last weeks decline roughly matched the rally that happened in mid-June.
Friday’s jobs report sent a message to the markets that the Fed is not in a hurry to ease monetary policy. Much of the rally in EUR/USD in June was predicated on the speculation that the Fed was sure to cut rates this month. Not only that, the markets were significantly pricing in 50 basis points in cuts.
These odds have dropped notably alongside EUR/USD. The futures markets no longer have much expectation of a 50 basis point cut but are still fully pricing in a 25 basis point cut.
In this context, Fed chair Powell’s testimony later this week will be important. The decline in rate cut expectations has taken the wind out of the earlier rally. Perhaps the prospect of significant easing measures in the near-term are off the table, but EUR/USD bulls will be looking for a broader term outlook to validate the bullish bias.
I do still think EUR/USD has some bullish potential despite the rather horrible technical outlook. The reason being is that the exchange rate trades near a multi-year low. Currently, I don’t think the fundamental backdrop is aligned for a technical breakdown.
I expect that last weeks decline has wiped out a lot of bullish positions. As the momentum remains strongly to the downside, I think that rallies in the early week will continue to be met with sellers.
The first level of upside resistance that I see falls at 1.1237. Above it, I see stronger resistance at 1.1265. A few of the moving average mentioned fall near the level. It also reflects a horizontal level that held it lower in May and it is near the lower bound of a trend channel that broke last week. The exchange rate traded very close to the level last week ahead of the NFP inspired sharp fall.
To the downside, I see support at 1.1188. The level has been respected in the past as both support and resistance. It also held the exchange rate higher on a dip in June.
- The technical outlook has deteriorated significantly for EUR/USD after last weeks fall
- At the same time, the pair might struggle to move lower considering the fundamental backdrop
- Support at 1.1188 looks like it might contain further losses in the early week.
This article was originally posted on FX Empire
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