EUR/USD – Battle of the head and shoulders

Correction over?

It’s been a few weeks since EUR/USD broke below the neckline of its head and shoulders and the response since has been a little sluggish, to say the least.

The trend was starting to look very favourable for the dollar as it enjoyed a bit of a resurgence, taking out the neckline of a head and shoulders pattern in the process.

Since then, it came back and tested a cluster of moving averages – 55/89 SMA band on the daily chart and 200/233 SMA band on the 4-hour chart – as well as key fib levels. This wasn’t a big concern, retracements are normal and they are standard rotation points after a breakout.

Since then, we’ve seen further resistance to the breakout and the 200/233 band on the 4-hour chart has fallen. This isn’t a gamechanger, but I would say it’s a red flag. The key fib zones remain in place and the 55/89 daily SMA continues to hold.

As long as this is the case, the head and shoulders breakout remains valid. The concern is that an inverse head and shoulders has now formed on the 4-hour chart in the midst of all the volatility .

The neckline of this isn’t as clear as the one on the daily chart but what is clear is that a break above 1.22 doesn’t bode well for the initial formation on the daily chart . And in fact, it could be quite a bullish signal for the pair.

At the moment, it’s still in tact and during his first testimony in the Senate, Powell hasn’t changed that. But we’re now at a critical level and things could become a lot clearer very soon.

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Craig Erlam

Craig Erlam

Former Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.