This week could be another pivotal for the EURUSD after the pair bounces from the 1.1700 support region last week and the US dollar index put in what appears to be a notable triple-top pattern formation.
Should we continue to see the 1.1700 level support level defended then the chances of a strong rebound towards the 1.1810 to 1.1900 region becomes very possible this week and plays directly against the so-called “taper trade”.
In fact, if we look at the EURUSD purely by its technicals then a strong rebound could be coming due to technical price divergences from the MACD and CCI indicators, which extend towards the 1.1845 and finally the 1.2050 area.
In my opinion, the main battle ground is now on the fundamental level in regard to which way the EURUSD breaks. Either the FED tapering is going to sink the EURUSD pair or broad-based US dollar weakness from inflation and over stimulus is going to cause the EURUSD pair to rally towards the 1.2700 level.
Frankly speaking, given the size of the stimulus packages and the infrastructure bill it could be hard for the EURUSD pair to drop, and even more so if we consider the downside risks to tapering that rising COVID-19 cases poses.
Sentiment towards the EURUSD pair has remained largely bullish at 66 percent, which is somewhat of a negative short-term sign. Too high levels of sentiment do not bode well for a strong recovery.
However, that does not mean that sentiment cannot worsen if the EURUSD pair rises, which could further support the contrarian view of a sudden rise towards the 1.2000 level.
EURUSD Short-Term Technical Analysis
The EURUSD pair is still bearish on the four-hour time frame, and will need to move above the 1.1810 level, the location of its 200-period moving average, to turn technically bullish.
As mentioned earlier, large amount of bullish price divergence has formed on both indicators, with the most striking areas of price divergence found at the 1.1845 1.1975 and 1.2135 levels.
EURUSD Medium-Term Technical Analysis
Looking at the daily time frame, a range break failed to take place after bulls defended the 1.1700 support area, which helped to form a notable triple bottom on the charts.
What I happen to like is the fact that we have a triple-bottom on the EURUSD pair and a double-top on the US dollar index.
If we base medium-term analysis and assuming this dynamic remains in place, then the EURUSD pair could be about to rise and the US dollar plunge.