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The EURUSD rallied back towards the 1.2185 level on Friday, after the United States monthly jobs number came in under market expectations. Prior to the release the pair had been lingering around the 1.2100 support area and appeared vulnerable to further losses.
Bond markets in the United States clearly expressed how most investors were feeling towards a possible bond tapering as the 10-year note fell towards the 1.55 percent level. This suggest that inflationary fears are also being pushed to one side, as well as the notion of the FED changing policy this month.
This week the stage is set for the EURUSD pair to continue to recover if bulls are able to keep the price above the 1.2160 area. This key technical price zone remained a trading pivot point for EURUSD traders last week.
Much also depends on the coming CPI inflation print in the United States this week. If US CPI does not rise as much as feared, then the stage is probably set for more upside in the EURUSD pair.
Given that the Federal Reserve will be in no rush to hike rates as the job situation in the United States is not entirely clear, a moderate US CPI number would almost certainly set the tone for more US dollar weakness.
Last week’s CFTC report from the futures market showed that EURUSD longs were the largest position in the market and increased by a further 5,000. This would imply that traders in the futures market are expecting more EURUSD upside.
This is opposed to market sentiment amongst the retail crowd on the spot market. The ActivTrader market sentiment tool shows that 62 percent of traders are bearish towards the EURUSD right. This suggests to me that Friday’s recovery could very well continue this week.
EURUSD Short-Term Technical Analysis
The EURUSD pair has fallen outside a large broadening wedge pattern across the four-hour time frame. Last week’s breakout under the wedge caused a strong sell-off towards the 1.2100 level.
It is possible that this pattern has now played out to the downside now. If EURUSD bulls can move the price above the 1.2220 to 1.2250 price zone this week then a major counter rally towards the 1.2330 to 1.2450 area should be anticipated.
To the downside, sustained weakness under the 1.2160 level and the EURUSD pair could test back towards the 1.2130 to 1.2100 support zones quite easily.
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EURUSD Medium-Term Technical Analysis
The daily time frame shows that a head and shoulders pattern will be invalidated if the EURUSD pair revisits the 1.2330 price area, and a large, inverted pattern will then form instead.
According to the size of the potentially invalidated head and shoulders pattern, a rally towards the 1.2800 area could be on the horizon over the medium-term.
Failure to overcome the 1.2250 to 1.2280 level this week and it is possible that the EURUSD pair will test back to the 1.2000 support level. My preferred scenario would see the 1.2330 level being broken before the EURUSD tests 1.2000 again.
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