After breaking below 1.30 yesterday, bears were hoping for a great smorgasbord of bearish feast. The appetizer was highly promising, with price trading as low as 1.292 during early European session after consolidating between 1.296- 1.298. This move allowed price to trade back into the descending Channel, suggesting that price could be reverting back to the original bearish momentum and potentially hitting the 1.29 round figure in its quest to hit Channel Bottom. However, instead of delivering the main course, bears had to relinquish their seats to bulls despite having their appetite whetted, who reversed the decline yesterday and then some.
The rally came as a surprise, especially since Euro-Zone was engulfed in a sea of risk-aversion sentiment. German Purchasing Manager Index for the Service sector (final) came in at 50.4, a sharp decline from the previous 51.3 estimate, while Euro-Zone PMI for both Service and Composite sectors were revised lower in the Final print. It is also worth noting that the recovery came in mostly during US trading session, which saw US stocks climbing higher. This resulted in the weakening of USD which propelled EUR/USD sharply higher. Looking at the aftermath of yesterday’s turns of events, we can conclude that USD influence continue to remain strong, and is able to trump even European weakening fundamentals.
From a technical perspective, things are still remaining bearish though. Firstly, price is back trading below 1.30, placing bearish feast back on the menu. Furthermore, yesterday’s recovery failed to break beyond 1.032 convincingly, suggesting that overall short-term bearish pressure remains. Stochastic readings are also signalling a bearish cycle underway, which lends weight to the overall bearish outlook shown.
Weekly Chart is less bearish though, as the recovery of prices has made current candle into a “Spinning Top” or a “Doji”, both of which implies uncertainty and is generally the precursor to a bullish reversal signal. Even though Stochastic readings are pointing lower, there is a chance that current peak could turn out to be an interim peak, and not a full bearish cycle signal. As such, we should seek stronger bearish confirmation from price action to affirm the weak stochastic signal. Preferably price should trade below the rising trendline (neckline of Head and Shoulders’ pattern) to instigate a strong longer-term move towards 1.25 and 1.20. Even if price stays below 1.30 but allow the Spinning Top/Doji candle shape to remain, the formation of H&S pattern may have to wait for yet 1-2 more weeks which will allow bulls to potentially claim initiative and rally back above 1.30 and towards 1.315/38.2% Fib confluence in the meantime.
We’ve seen the strength of USD influence on EUR, as such, we should not belittle any potential bullish efforts that arise from such volatility despite the fact the longer-term bias is still pointing lower. Evey single day that technical bears do not claim victory will be one more day of upside risk given the unpredictability of US stocks and hence USD. With NFP coming up on Friday, ideally bears would want to form the H&S pattern before the event risk, but looking on balance of things, perhaps we do need to ride the storm on Friday and allow bulls a fighting chance. But all is not lost, for USD may turn out to be stronger post NFP, and be the saving grace bears need to end this week below the neckline.
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