Fundamental Bulls vs Technical Bears – Winner: Technical Bears. In the latest round of eternal struggle between reason and market sentiment, market sentiment wins yet again. EUR/USD rallied yesterday during early European hours on stronger than expected German PMI Manufacturing which came in at 52.0 vs 51.1 expected, and an improvement from previous month’s 50.7 read. This is also the highest print since Aug 2011, suggesting that since Service sector in Germany was also stronger than expected, with the PMI index hitting 52.4 vs an expected 51.7. The strong German numbers more than make up for French’s earlier disappointment, allowing the Euro-Zone PMI Manufacturing to hit a 26 months high. Euro-Zone Service PMI was also equally bullish, reversing the 18 months of consecutive decline prior to this. Yesterday’s print supported the notion that Germany is indeed pulling herself out of the water, and dragging the rest of the Euro-Zone with her. This also add credence to what Euro-Zone leaders have been saying recently – recession is ending in Euro-Zone, and better numbers can be expected in Q3 and Q4.
EUR/USD rallied following the release of number. Prices pushed from an Asian session floor of around 1.333 to reach 1.3365 resistance level. This is when everything started to unravel – technical bears started to sent prices back towards 1.330 despite news wires remaining silent during the time period. The bearish reaction was also much stronger than that of the rally that occurred just 1-2 hour before, giving us a clear idea which is the stronger driving force currently. The fact that the decline was supported around 1.330 also provide further evidence that we are indeed under strong technical influence right now.
With this in mind, it is unlikely that EUR/USD would be able to break the 1.3365 resistance as there are strong technical headwinds against it. Stochastic readings are currently pointing lower after briefly entering the Overbought region earlier. Ichimoku also favors downside scenarios with Overhead Kumo pushing price lower. In terms of support lines, we can see 1.335 round figure which is keeping price afloat currently. It is likely that Kijuu Sen (red line) will be able to provide some form of support as the level is around the tighter consolidation zone found between 16th to 20th August, and as recent as 22nd August. However, as both support levels are relatively close to the 1.3365 ceiling, it is possible that both lines can be broken easily by volatility, and acceleration towards 1.330 may occur once again when the levels are broken.
Longer technicals suggest that the rising Channel is still in play. Price was supported by Channel Bottom and confluence with the 1.330 round figure resistance turned support that has more relevance in the past (not seen on chart). Stochastic readings however is actually pointing lower, favoring a bearish cycle from here. Looking at price action alone, the rejection of 1.34 resistance is disconcerting for bulls, and we have a Bearish Engulfing and arguably a Tweezer Top bearish pattern. This makes the test of 1.34 even more critical – failure to break above 1.34 would open up another test of Channel Bottom in quick succession, and may usher in stronger bearish correction if in line with what Stochastic and Candlestick patterns are hinting.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.