Euro Bounce after EUR/USD Fibonacci Support Test, Falling Wedge Build

As I covered in the weekend video I still think EUR/USD is largely along for the ride as larger macro drivers are in-play, but that doesn’t mean that structure doesn’t matter and that setups won’t appear. It simply means that how those structures play out will have impact from other items that may be more unrelated to the Euro than normal.

Ever since USD/JPY snapped back in late-January after the BoJ rate decision it’s seemed that the pair has been the primary driver of macro trends in the FX market, and given the five year outlay where USD/JPY remains up 50% while most other FX markets are roughly flat it makes sense as to why. Price moves on the basis of supply and demand more than headlines and narrative (although the two can be related) and the fact that traders are still holding on to a rally of that magnitude illustrates a still-crowded trade.

If that crowded trade becomes a crowded exit, matters can get messy fast and this is what drove that EUR/USD breakout in late January for the pair to re-test above the 1.2000 level for the first time since the summer of 2021. And in a related matter, it was the USD weakness that showed back up in November, right when DXY failed to breakout at 100.22, that helped to drive the EUR/USD rally from the 1.1500 handle.

Both instances illustrate how structure at major psychological levels held even though another driver was pushing USD flows and, in-turn, EUR/USD flows. If we do see another rush of USD-weakness, which I think will need to emanate from a USD/JPY sell-off or pullback, EUR/USD remains an attractive venue, and there’s now some structure with which to illustrate that scenario.

Last week saw a major Fibonacci level come into play at 1.1748. This is a price that has been in-play for the past almost eight months, initially as resistance and now as support. It’s also related to a Fibonacci setup that’s had a number of turns and inflections, including the 2023 high at the 61.8% retracement or last year’s low at the 23.6% level. I even talked about that and used it as illustration of Fibonacci in an evergreen article on the topic a year ago that you can read here: Fibonacci in Financial Markets.

The below weekly chart has just major psychological levels and that Fibonacci retracement applied and notice how many inflections are caught at these very simple, obvious price levels.

EUR/USD Weekly Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD Falling Wedge

The falling wedge is a bullish reversal formation and it’s largely driven by deduction. As a key level comes into play and the possibility of a bounce builds, sellers will often show trepidation near those lows as the perceived top-end gets smaller and smaller. Reacting to a pullback or lower-high is a different story, however, as that aggression remains as indicated by the more-aggressive angle of the upper trendline.

But if that support is to hold – then the tide can soon turn, and that’s why the formation is often approached from a bullish perspective.

We have one of those on the EUR/USD chart now as 1.1748 has come in to hold the lows. And interestingly, there’s confluence with another trendline, as taken from support of prior resistance from the bull pennant formation that led to the January breakout.

EUR/USD Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

EUR/USD Short-Term Structure

From the four-hour chart it’s still early but there is a short-term higher-high with the push up to (and hold of) the 1.1837 level. So it’s still very early but there’s now an open door for buyers to make a push.

As to whether that plays through, I think it will drive back to the USD/JPY matter, but if looking for USD-weakness that setup is complicated by both carry rates and bigger picture support structure, whereas EUR/USD has a few items that could be argued for both EUR/USD strength and USD-weakness.

EUR/USD Four-Hour Price Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Market Analyst, Global Macro