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The EURUSD pulled back from the 1.2266 resistance level yesterday after the US dollar index staged a false bearish breakout on Wednesday and Federal Reserve member Charles Quarles talked up the need for QE taper discussions.
Financial markets, and particularly foreign exchange markets, are ultra-sensitive towards talk of taper QE. The EURUSD pair dropped immediately on Wednesday after Quarles noted that “It will be important to begin discussing plans to adjust QE at upcoming meeting”.
Quarles comments also mirrored FED member Clarida’s recent remarks about the need for taper discussion. This put foreign exchange traders in a tough spot because the trend in the US dollar index is down, however, bounces over coming taper discussions could certainly occur.
Prior to the comments the EURUSD had been trading at a multi-month high, with the pair testing levels not seen since early January 2021. The market’s attention now turns to the release of US GDP and Core PCE later today.
Core PCE will be a big deal for financial markets as rising inflationary pressure is one of the primary drivers for financial market sentiment at this moment in time. The EURUSD pair is likely to be especially volatile after today’s US data dump.
Sentiment towards the EURUSD has been dropping this week. The ActivTrader market sentiment tool shows that some 59 percent of retails traders are negative towards the EURUSD. This is down 4 percent from the start of the week.
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 ascending wedge pattern across the four-hour time frame, which is now present between the 1.2160 and 1.2280 level.
These patterns are typically bearish, so a decline under the 1.2160 support level could cause a big drop as technical sellers move into the EURUSD short trade.
It is noteworthy that MACD indicator show bearish price divergence has formed 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 continues to show that a large head and shoulders pattern is still valid and is offering a slight bearish warning to medium-term traders.
EURUSD bulls need to breach the 1.2330 area to invalidate this large and highly significant price pattern. It is also noteworthy that a huge, inverted head and shoulders pattern will form if the EURUSD reaches the 1.2330 level.
Overall, it is critical that the EURUSD pair reaches the 1.2330 level over the coming week to cement its future upside price path.
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