The euro currency staged a major rebound against the US dollar on the foreign exchange market last week after sellers failed to force a technical breakout below the 1.2060 level, and the ECB sounded more hawkish than markets had expected.
Another factor in the EURUSD pair’s recovery was the US dollar index. Bullish comments from US Treasury Secretary Janet Yellen towards the upcoming US economic stimulus package quickly caused the recent rebound in the greenback to fade.
Traders also bought the euro currency after the German manufacturing PMI came in better-than-expected this week. German manufacturing growth is essential to the health of the overall eurozone economy.
Market participants even swept aside fears about the Italian economy last week. Reports suggested that the Italian Prime Minister Conte was considering a new election. This caused Italian bond yields to rise, although it not derails the recovery in the EURUSD pair.
Some sources also suggested that several members of the ECB Governing Council were more concerned about the health of the eurozone economy than was stated during the recent ECB policy meeting. Again, the euro currency marched higher, despite these reports.
A potential reason for euro strength could be crossflows into the EURGBP pair. After staging what looked like a technical breakout early last week, the EURGBP cross pair quickly reversed, and ended the week higher as the British pound reversed.
Negative news coming from the UK caused a flight from British pound into euro’s. This could certainly explain the sudden demand for the euro. However, the EURUSD component is slightly more nuanced, with many investors and traders still waiting on the fence to see what happens with inflation, stimulus, bond yields, and the direction of the US dollar index.
EURUSD Short-Term Technical Analysis
According to the four-hour time frame a bullish inverted head and shoulders pattern will form if the EURUSD pair recover back towards the 1.2220 area. The size of the pattern implies a major upside move towards the 1.2400 area could be forthcoming.
The pattern is emblematic of the dilemma that face euro traders at the moment. Bears are looking for the EURUSD pair to start to fade, however, EURUSD bulls still believe the pair could start to head to new multi-year highs.
Source by ActivTrader.
In the near-term the 1.2190 area is likely to be a major battle ground for control of the EURUSD pair. If bulls can anchor price above this area then new highs should be expected. This is where the 200-period on the four-hour time frame is located. Gains above this area could provoke a bounce towards 1.2220 to 1.2270.
Failure around the 1.2220 to 1.2270 region and the EURUSD pair could easily revisit the lows from last week, and possibly sink towards 1.1800. Gains above 1.2270 and bulls will probably be encouraged to test towards the 1.2350 level.
EURUSD Medium-Term Technical Analysis
Looking at the daily time chart, it certainly appears that a large head and shoulder pattern is unfolding, with the latest move higher appearing to be a push higher to form the final right-hand shoulder to complete the overall structure of the bearish price pattern.
If the pattern proves correct then the final right-hand shoulders should be terminating somewhere above the 1.2200 area. More conservative traders may wait for sellers to hold price under the 1.2060 level to activate the large bearish pattern into action.
Source by ActivTrader.