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The EURUSD pair suffered heavy losses last week as the US dollar index rallied back amidst heightened risk aversion and the notion that the much-anticipated FED taper is back on the table.
Euro bulls we crushed as the drive higher in the greenback meant that an imminent upside breakout in the EURUSD pair will likely be delayed for some time to come in the FX market.
This week is likely to be even more important for the direction of the EURUSD pair. Not only is the US dollar index sitting at a technical breakout point, but so is the EURUSD pair.
Bulls have been able to defend the 1.1700 level for much of the summer, which dips under the 1.1700 level being seen as strong buying opportunity. If the greenback breaks the upper range on hawkish taper talk, we could be seeing the euro in a much lower range against the US dollar.
The range would likely be between the 1.1600 to 1.1300 area, and the next range for the US dollar index would more than likely be around the 93.50 to 96.00 mark I suspect.
Should we see the 1.1700 level defended and the FED sounding less hawkish and more cautious towards tapering then expect the EURUSD pair to race back towards the technically important 1.1850 area.
The ActivTrader Market Sentiment tool shows that some 35 percent of traders are bearish towards the EURUSD, meaning that most traders are expecting a rebound in the pair.
Keep a close eye on sentiment this week, ideally EURUSD bulls need to see bearish sentiment rising in order for a big recovery to finally take hold.
EURUSD Short-Term Technical Analysis
Negative price divergences across the CCI and MACD indicators have been unwound with last week’s drop under the 1.1750 level, however, a bearish price pattern looms large extends e.
According to the overall size of the bearish pattern the EURUSD pair could drop towards 1.1600 area, marking a sizable 150-point decline from the 1.1750 price zone.
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EURUSD Medium-Term Technical Analysis
Looking at the daily time frame, it is very hard to see what could be happening. A large and complex inverted head and shoulders may be forming; however, the head may still need to form.
It is a possible a final price drop towards the 1.1600 to 1.1500 area may need to form in order for the head of this potentially massive bullish pattern to be fully established.
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