EUR/USD traded lower yesterday during US session in line with “risk off” sentiment seen in US stocks. This pulled EUR/USD from a day high of 1.3966 to a low of 1.3845, erasing all the gains made during Asian hours previously. To be fair, the decline started before prices of US stocks began declining, and that would normally be interpreted as a sign that sentiment in EUR/USD may be slightly bearish. However, in this case leniency should be given as the initial pullback is understandable given that there was lack of strong justification for prices to rally during Asian hours. Furthermore, prices were staying above the 1.394 soft support until the slide in US stocks started, suggesting that overall sentiment is actually bullish and not bearish.
If the above analysis is correct, we should be able to expect strong support from 1.385. Stochastic readings supports this as well, with readings currently Oversold and favoring bullish pullbacks moving forward. However, that doesn’t mean that 1.385 support is invincible. Firstly, we’ve just avoided a proper bullish cycle from taking flight just a few hours ago, suggesting that bearish pressure isn’t exactly fully gone. Also, given that global risk appetite is still bearish, bears have winds on their sail and could overcome 1.385 if push come to shove. Therefore traders who wish to play the 1.385 rebound may wish to wait for further confirmations and/or keep stop losses tight as a confirmed break of 1.385 can bring us quickly to 1.375 and below.
Fundamentally, case for sustained EUR/USD push is weak as USD is expected to strengthen due to Fed’s tightening of monetary policy. On the other hand, ECB has no indication of tightening even though Draghi and his fellow board members have started to move away from their previous dovish stance. Hence, even though upside potential for EUR/USD is weak, that doesn’t necessarily translate into strong bearish potential either.