EUR/USD Technical Analysis
EUR/USD has declined by over 0.80% during the last two weeks, and the chances are that the bearish trend will continue, but it all depends on the Fed’s monetary policy update that will be released on July 28.
We explained the fundamentals behind EUR/USD’s decline in a recent post, and we’re about to briefly go through the technical analysis aspects of the latest price moves.
On larger timeframes, the pair is fluctuating relatively close to the lowest level year-to-date, currently trading at 1.1771. The YTD low was touched at the end of March at 1.1703. During the last two weeks, the price extended the general bearish trend, though not with the same intensity as in June, when the pair collapsed over 200 pips in a matter of days.
On Monday, July 12, EUR/USD was trading at 1.1878, and it fell just below the psychological level of 1.1800 the following Monday. During the week ended July 23, the pair tried to consolidate above 1.1800 on several occasions, but that turned into a solid resistance level. Eventually, the price gave up and fell 30 more pips after the European Central Bank (ECB) presented its more dovish stance on Thursday.
So what may happen next?
Descending Triangle Points to Bearish Trend Continuation
There are several technical analysis hints suggesting that the pair may continue to decline. Moreover, it seems that the fundamentals are also supporting a bullish story for the greenback.
To begin with, when looking at the H2 chart as of July 23, we can see a descending triangle pattern.
The descending triangle is one of the most popular chart patterns among forex traders, and it is pointing to the continuation of an existing bearish trend. Particularly, it shows that demand for the euro is gradually weakening, and once the price breaks below the horizontal support line near 1.1760, it may continue the downtrend with greater intensity.
It may happen that the price action extends the horizontal move near the support level until the Fed’s meeting scheduled for July 28, and only after that traders can make the next major decision to continue to sell the euro or support it for a while.
Death Cross Shows Up For First Time Since June 2018
When exploring larger timeframes, such as the standard D1, we can notice a powerful trading signal that happened only recently. It is the death cross, which is the opposite of a golden cross. In a nutshell, the death cross happens when a short-term moving average (MA), usually with the period of 50, crosses a long-term MA, such as a 200-day MA. When this intersection of the two MAs shows up on the chart, swing traders are ready for a major sell-off.
You can see on the chart that the death cross happened on July 22, shortly after the ECB meeting.
In the chart, the 50 MA (blue) is crossing the 200 MA (red) from top to bottom, which is a strong bearish signal. The 50 MA had an initial attempt to break below the long-term MA in May, but it failed to do so. On Friday, the breakout was confirmed. To understand the importance of this bearish signal, think about the fact that the previous death cross happened in June 2018, as seen in the chart below:
Once the 50 MA starts moving below the 200 MA, the latter becomes a strong resistance level.
Double Top Seen on Weekly Chart
If we zoom out even further to look into the weekly chart, we can see another popular pattern, which is the double top. As you may know, it provides an extremely bearish signal.
As the name suggests, a double top is confirmed when the forex pair reaches a high two consecutive times with a moderate decline between them. The correction between the two peaks provides the so-called neckline, which acts as the support level and a strong signal line to go short. Thus, when the price breaks below the neckline, it might continue with the downtrend.
As we can see on the EUR/USD’s weekly chart, the price is now hovering near the neckline’s support level, and if it breaks below it, the bearish trend may gain traction.
The Final Word
As you observe, there is a confluence of bearish signals coming from the three main timeframes (hourly, daily, and weekly), which seems to leave no room for a long-term bullish move.
Going back to the H2 chart, the oscillators are neutral and don’t point to any particular direction for the coming days. The relative strength index (RSI) is fluctuating near its 50 line, while the MACD is not very far from its center line. Meanwhile, the Bollinger Bands have been narrowing, which points to the continuation of a horizontal channel for the coming days.
Indeed, the EUR/USD pair might continue to trade near 1.1770 until the Fed releases its statement, which will define the next short-term trends.
As for the long-term outlook, the USD seems to be the winner, and the fundamentals are also favorable for the American currency.
Reuters analyzed Friday data from the US Commodity Futures Trading Commission and calculated that the value of the net long USD position was $399.69 million in the week ended July 20, which is the first long position since March 2020. The previous week saw a net short of $4.06 billion.
The USD is benefiting from its safe-haven asset status amid concerns over the Delta variant of the coronavirus and the less dovish Fed.
ING said in a note:
“The combination of a less dovish Fed and the Delta Variant has certainly hit portfolio flows to emerging markets, which have been negative in five out of the last six weeks. This has certainly provided support to the dollar. It is hard to see this trend turning in the immediate future.”
While technical analysis offers great insights helping you understand the price action, it doesn’t mean that the pair will necessarily behave according to the forecasts it provides. This is why it’s important to use stop losses and implement risk management techniques.