EURUSD Technical Analysis – US dollar index holds the key

The euro currency bounced back against the US dollar last week, after coming under pressure towards the 1.2060 level as the European Central Bank actively tried to talk the single currency lower. However, selling pressures have returned this week as the greenback is threatening to breakout to the upside after weeks of sideways trading action.

Uncertainty over the overall direction of the US dollar currency caused traders to pause selling the EURUSD pair in recent weeks, although with stimulus talks gaining traction the buck is starting to look bid again.

A major directional breakout in the US dollar index could bamboozle a new short-term trend in the EURUSD pair. For all intents and purposes, an eventually upside breakout in the index looks more likely than not.

The current state of play for the EURUSD pair is once of uncertainty. The technical show a clear path lower, however, until the US dollar index starts to definitively break to the upside then two-way trading action is assured.

Another factor at play is Italy. Former ECB President Mario Draghi is being lined-up for the top job in Italian politics. If Draghi does succeed, then the euro currency is likely to experience a relief rally of sorts.

This is naturally making traders cautious, especially with mixed economic data coming from the US economy. Going forward a breakout in the US dollar index is almost certainly required to forge a clear path ahead for the EURUSD pair.

Something else to pay attention too is the US stock market. The ongoing Wall Street versus Main Street battle could cause hedge funds to close existing winning position, hence a flight into the greenback could be perceived as likely.

During the upcoming week, if risk-aversion persists due to the ongoing squeeze in heavily shorted hedge fund stocks, then a down move in US stocks could be a major bullish catalyst for the US dollar currency. This could propel the EURUSD pair lower, and in effect take cause a massive breakout in the US dollar index.                               

EURUSD Short-Term Technical Analysis

According to the four-hour time frame a massive head and shoulders pattern has been shaping-up over recent weeks. Sellers have been unable to break under the neckline of the patter, around the 1.2060 level.

Traders will likely ramp up short positions towards the EURUSD pair this week if the 1.2060 level is broken with conviction, placing the 1.1900 and 1.1800 levels as potential downside targets.