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The EURUSD pair pulled back sharply from the 1.2200 handle last Friday after the US manufacturing PMI came in at 61.5, while the services PMI came in at a staggering 70.1, which broke records dating back over a decade in terms of United States services activity.
Traders and investors were clearly inclined to buy the US dollar on the strong PMI data print, which sent the EURUSD pair back towards the former key swing-low, around the 1.2160 level. This sets the stage for an interesting week ahead for the EURUSD pair, which looks to be increasingly influenced by the mood towards the US economy, and indeed the US dollar index.
Touching on the economic backdrop in the United States, and the stronger than expected PMI data, IHS Market’s Chief economists noted “The United States economy saw a spectacularacceleration of growth and May”. Although the same economists also warned that businesses been “constrained by supply shortages and difficulties filling vacancies” and that average selling prices for goods and services are both rising at “unprecedented rates”.
Inflation is also going to be coming into the forefront of traders mind this week as we see the release of the Core PCE number from the US for April. This is the preferred gauge of inflation that FED members, making the release an even bigger deal for market participants.
Overall, I expect the US dollar to lead the way on the foreign exchange market, with markets intensely focused on economic data that gives a snapshot of the inflationary environment in the United States.
Sentiment towards the EURUSD has been fluctuating wildly this week. The ActivTrader market sentiment tool shows that some 64 percent of retails traders are negative towards the EURUSD.
Typically, this reading is bullish, as we look to fade the herd when trading retail sentiment. If bearish sentiment increases, I would be mindful that a powerful recovery could soon take hold in the EURUSD pair.
EURUSD Short-Term Technical Analysis
The EURUSD pair has formed an inverted head and shoulders pattern continues to play out across the lower time frame and has yet to reach its ultimately upside objective of 1.2380.
Bears need to move the price under the 1.1980 level to invalidate the bearish pattern. This may cause a drop towards the 1.1780. This bearish scenario seems unlikely at this moment in time given the overall bullish trend in the euro since last year.
According to the MACD indicator bearish price divergence continues to unfold and is present until the 1.2100 level. Dip-buyers could step in around the 1.2100 support area this week in expectation of a rebound towards 1.2240 and 1.2380.
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EURUSD Medium-Term Technical Analysis
The daily time frame is showing that a head and shoulders pattern is still valid and is offering a slight bearish warning to medium-term trader.
EURUSD bulls need to breach the 1.2330 area to invalidate this large and highly significant price pattern. Personally, I prefer the bullish scenario, whereby the pattern is invalidated and a medium-term rally towards the 1.2800 area takes hold.
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