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The euro currency has suffered hefty losses and moved back to last week’s key breakout zone against the US dollar after the greenback surged higher after yesterday’s much stronger than expected US CPI inflation report.
Foreign exchange traders that were short the US dollar were caught out in a significant way, as the April consumer price index number showed that consumer prices in the US economy jumped by the most in nearly 12 years.
The 0.8 percent monthly CPI increase was the largest monthly advance since June 2009, while core CPI, which has historically been more volatile, and includes much more volatile items such as energy and food hit 0.9 percent.
Market participants now fear that the FED is going to hike rates much quicker than expected if CPI continues to climb at this pace, which goes in the face of the central banks calls for this period of increased inflation just being “transitory”.
FED officials have already been on the wires talking down yesterday’s number. The investment bank JP Morgan Chase has stated they believe the FED will cut back QE next year, while the FED’s fund rate is pricing in an 80 percent chance of a rate hike by December 2022.
The EURUSD is still not down and out, and for all intents and purpose sits at a crossroad. Currently the pair is testing breakout resistance from last week, meaning that that the euro is either a great buying opportunity right now, or it could falter further towards the 1.2000 support zone.
Looking at retail sentiment, bearish sentiment towards the EURUSD pair has reached 58 percent now, which means that retail traders are on the right side of the move right now, given the decline from 1.2170.
I would suggest keeping a close eye on sentiment over the next few days. Should we see bearish sentiment increase it is highly likely that a bear trap could be forming. Alternatively, increased positive sentiment would be a bearish red flag for me.
EURUSD Short-Term Technical Analysis
The EURUSD pair is testing back towards the top of a large descending broadening wedge pattern, that the EURUSD pair exploded above last week.
If we see bears moving the price below the 1.2070 level, which is the top of the pattern, a steep decline could take place towards the 1.2000 to 1.980 area.
If we see the EURUSD pair bouncing from the top of the pattern, then expect a powerful counter rally back above 1.2200. The EURUSD pair could then target towards the 1.2240, 1.2300 and 1.2400 while the wedge break remains in play.
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EURUSD Medium-Term Technical Analysis
Looking at the daily time chart, a bearish head and shoulders pattern remains the central focus. The recent reversal from the 1.2170 level will keep bears hopes alive.
Traders should be ultra-cautious about becoming too bearish towards the EURUSD as the overall trend in the EURUSD pair is still distinctly bullish on the lower and higher time frames.
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