EUR/USD enjoyed the weakening of USD during Asian hours which drove Gold below 1,200, allowing EUR/USD to break 1.305 short-term resistance. This move is significant due to the fact that it reduces the immediate risk of a 1.30 break, which may translate into a stronger bearish acceleration as the Head and Shoulders pattern take shape (see Weekly Chart below). However, this does not mean that the possibility of the H&S pattern forming has been fully negated. In fact, it is even difficult to say that Short-Term bearish pressure has been negated even, as 1.31 remain untested after breaking it on 25/26th June. Even if 1.31 is broken, 1.315/38.2% Fib retracement will provide yet another level of resistance, allowing current short-term pressure to reign.
To twist the knife further, Stochastic readings and Signal lines are both within the Overbought region. Even though this does not mean price would simply trade lower from here, it certainly impairs the likelihood of price being able to break the 1.31 level to begin with. Nonetheless, a test of 1.31 is still possible as bullish momentum is not yet proven to be over. A proper Stoch bearish cycle signal will only appear after both Signal and Stoch lines have turned around and push below 80.0 – given current price levels, it could mean when price is rejected from 1.31 or a break of 1.305 which will expose 1.30 again.
Longer term chart is still favoring the decline from May 2011. Despite this, the rally from Aug 2012 cannot be ignored since 1.30 is still standing. This suggest that the battle between bulls/bears in the long term will perhaps need to be settled next month. That being said, if price does manage to break either 1.30 or 1.315/38.2% Fib by tonight, we could see rapid acceleration to downside/upside respectively next Monday with technical bears/bulls coming out strongly to dictate the flow for the rest of the month. Should price remain between 1.30 – 1.315, we may perhaps need yet another week or perhaps even a month for a clear winner to emerge.
Fundamentally, Euro-Zone is not doing well, that much is obvious. Comparing this to the stronger US economy which Ben Bernanke is comfortable with (to such an extend that he is willing to stop QE), we have Draghi who is still playing the “ECB will solve all problems” trump card. This difference in tone from Central Banks isn’t obvious right now, with EUR/USD still relatively flat from 1 week ago, but may be more apparent in 2H 2013 especially if 1.30 is broken together with the materialization of the Head and Shoulders Top pattern.