Euro Technical Forecast: EUR/USD Falls, Threatens Reversal into the Fed

EUR/USD, Euro Talking Points:

• EUR/USD has started the week with a steep fall after running into resistance last week.
• I looked at a series of levels in the Tuesday webinar, the first of which came into play to hold the highs on ECB Thursday. Since then, EUR/USD has continued to pullback and the pair has now fallen by more than 160 pips from the high last week.
• I’ll be looking into EUR/USD amongst several other major pairs ahead of the FOMC rate decision on Wednesday. Click here to register.

The selling in EUR/USD really got started around the Euro open this morning but so far, it’s been a sizable move to start the week for the pair. Perhaps it’s a bit of ‘buy the rumor, sell the news’ or maybe it’s just squaring up ahead of a pivotal week for U.S. markets, as we have the FOMC rate decision on Wednesday, Core PCE on Thursday and then NFP on Friday; not to mention rate decision out of Canada and Japan. But, this also could be symptomatic of the overbought move that had built in the pair in the first half of this year that still hasn’t shown much for pullbacks.

After all, while fundamentals can drive future prices and technicals can help to explain context and establish strategy, it’s sentiment and positioning that really drive markets. Because if anyone willing or able to be long already is, well then even the brightest news in the world can fail to push a market higher. And then the very deduction of prices moving down on good news can frighten other longs, which can cause selling and more supply which then shakes more bulls out of the market – and before you know it, we have a reversal.

We haven’t seen much of that for EUR/USD since the second week of the New Year, and to be sure, back then, it was the polar opposite, as a back-breaking  downtrend in the pair held through the New Year open and calls for parity seemed to be everywhere. It was around that time that support build at the 1.0200 handle, the 23.6% Fibonacci retracement of the 2021-2022 major move, sowing the seeds for reversal that ended up hitting in March and April.

Since then, there’s been only minor retracements in the pair but bulls haven’t completely lost their grip yet. The big question is whether that’s in front of us as resistance has started to build around the 78.6% retracement of that same major move.

EUR/USD Weekly Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD Daily

Reversals often take time and this is probably where many traders stumble. But a big reason for that can be the positioning mentioned above, because it’s rare that sentiment will suddenly flip from bullish to bearish like a light switch being flipped on at night. Normally, there’s a grinding in positioning as bulls that are late to the party remain aggressive at lows or on pullbacks, while getting more and more shy at highs or near resistance. This leads to the build of a rising wedge formation, which is often approached with aim of bearish reversal for just that reason.

And as bulls start to lose motivation at or near highs, those that have ridden the trend start to get more motivated to take profits, leading to more and more supply. Eventually, tests of support will lead to breakdowns as stops on long positions get hit, adding even more supply to the market. And this is when sellers start to get more aggressive in pushing breakdown moves on tests of fresh lows.

We haven’t quite gotten to that part yet. There has been the build of a rising wedge in EUR/USD as that Fibonacci resistance has come into play. And we’ve seen a breach of a short-term lower-low, which has so far been followed by a lower-high.

The big question now is whether we can see sellers step on the gas upon tests of supports. We’ve already seen the 1.1663 and 1.1632 levels taken out today but the next big one down is 1.1560, followed by the 1.1500 psychological level.

EUR/USD Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD Near-Term Strategy

The fall in EUR/USD so far this week has been quick and aggressive and chasing such a move can be a daunting prospect. Instead, looking to work with shorter-term trends in the context of that larger reversal potential could be a more amenable way to move forward. For aggressive strategies, there’s now resistance potential at both 1.1632 and 1.1663. Above that, the 1.1686 level is of note as this is the 76.4% retracement of that same major move noted above, and the 1.1748 level which held the highs on the daily bar on Friday is the 78.6% marker of that same major move.

EUR/USD Four-Hour Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Strategist