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The EURUSD pair came under significant pressure last week due to a major breakout in the greenback. The US dollar index actually had its best trading week in two-years on the foreign exchange market.
The EURUSD had experienced modest gains over the past few weeks, however, the sudden failure and subsequent rejection at 1.0400 has forced another crucial test of parity.
The pair is still suffering selling pressure as after losing nearly 400 points over the last several days. Another break under pair could be the final straw for EURUSD bulls, as this latest recovery now looks like a classic bear market rally.
Worrying inflation data from Europe and a looming energy crisis are all reason enough for traders to be fearful of a major decline under parity. I actually think the EURUSD could hot 0.9500 or even 0.9000.
Should we see further aggressive rate action and the ECB hesitant to hike rates and in small increments then the US dollar long trade is only going to accelerate and pressure the EURUSD lower.
The ActivTrader Sentiment tool suggests that 68% of traders are bullish on the EURUSD. This is very worrying if we consider that traders are still buying into the dip despite the latest price drop.
As traders, we typically look to fade retail sentiment when it is overly skewed in one direction. This style of trading, fading sentiment, has been one of the most effective and used tactics of hedge funds.
Should we continue to see bullish sentiment growing this week then I predict that we are going to see more heavy losses in the EURUSD below parity.
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The EURUSD is currently in the process of falling from a rising wedge price pattern. The size of the wedge would indicate that a short-term bottom could be nearing around the 0.9950 area.
However, a much larger bearish price pattern could be forming. This could actually take the EURUSD pair close to 0.9500 in a very short-term according to its overall size.
As seen by the daily chart below, a massive head and shoulders pattern has formed. This is probably the most worrying chart for the EURUSD over the medium-term.
This pattern is actually projecting a move way below parity. The target of 0.9000 is seen, and possibly even lower if this pattern is correct.
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