The euro currency tumbled back under the 1.2100 level against the US dollar yesterday after European Central Bank policy member Klaas Knot said the central bank has tool to fight appreciation in the euro.
This caught currency traders off-guard and the EURUSD pair quickly plunged towards critical technical support, around 1.2060, while a number of euro crosses tumbled on the foreign exchange market, such as EURGBP and EURCHF.
Markets clearly paid attention to ECB member Knot as the EURUSD pair has been well-supported for nearly nine months. It now remains to be seen whether the market believes the Euro Central Banks statement, and indeed if verbal intervention from ECB members such as Klass Knot is going to be enough.
Yesterday, another source from the European Central Bank was also quoted as saying that financial markets are underestimating the chance of a rate cut from the ECB. The ECB have said they do not interfere with the euro exchange, so this was a major change from the central bank.
It is puzzling as to what caused the change in policy language the ECB, as President Lagarde failed to mention euro strength during the last ECB policy meeting. Potentially, the central bank is expecting more US dollar weakness ahead as stimulus is delivered to the US economy.
I happen to believe that verbal intervention may not be enough here. Previously the market has been known to test the European Central Bank, so the ECB are playing a dangerous game here if the euro continues to rise.
Weakness in the EURUSD exchange rate is vital for EUR manufacturers to remain competitive. It is clear that the latest set of manufacturing and IFO numbers from the German economy may have worried the ECB.
Another bearish factor supporting EURUSD weakness is traders sentiment. According to the ActivTrades Market Sentiment indicator, just some 32 percent of traders are bearish towards the pair at this current moment.
This could be a negative development for the EURUSD pair as retail traders typically lean against established or emerging market trends. It will be worth keeping an eye on traders sentiment over the coming days and weeks.
EURUSD Short-term Technical Analysis
The four-hour time frame shows that that the short-term trend remains bearish while price trades under the 1.2150 level. According to the Parabolic SAR indicator the next major downside move should take place once the 1.2060 level is broken with conviction.
It is difficult to be bullish towards the EURUSD pair despite the overall uptrend. The EURUSD pair has been sold on rallies, however, until multiple daily closes under the 1.2060 level take place it really is a coin toss.
Other technical indicators are showing that the EURUSD pair is oversold in the short-term. So, the chances of a technical bounce at some stage are also high.
Source by ActivTrader.
EURUSD Medium-term Technical Analysis
The daily time frames continue to show an extremely large head and shoulder pattern, which comes into focus once again if the EURUSD pair trades under the neckline support, around 1.2060.
According to the overall size of the bearish price pattern the EURUSD pair is probably headed close to the 1.1800 handle over the medium-term horizon if weakness under the 1.2060 persists.
In terms of potential sell spots on rebounds if the 1.2060 level proves another sticking point for bears, the 1.2160 and 1.2250 levels are the main upside areas to watch.
Source by ActivTrader.
