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EUR/USD Rebound Looking Increasingly Like a Bull Trap: Key Trading Levels

Published 18/01/2024, 12:01
Updated 11/03/2024, 12:10
  • The EUR/USD pair is slightly stronger, but the US dollar's resurgence keeps it under pressure, requiring more price action to attract bullish interest.
  • Short-term trend remains downside-oriented, and despite the current calm, selling pressure may resume.
  • This could intensify if central banks like the Fed, ECB, and BoE don't reduce interest rates as expected.
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The markets were a little calm in early European trade on Thursday, after the major US indexes managed to bounce off their lows on Wednesday following a sizeable drop in global indexes and U.S. futures earlier in the day.

Correspondingly, the EUR/USD pair was a touch firmer at the time of writing. But with the US dollar making a strong comeback, this popular currency pair is not out of the woods just yet.

More price action is needed to entice the bulls. For now, the short-term path of least resistance remains to the downside.

Calmer market conditions may not last

Despite the calmer conditions, the selling pressure on risk assets, and therefore the EUR/USD, could resume without a fundamental change in the current macro backdrop.

Right now, the big concern is that the major central banks like the Fed, ECB, and BoE will not reduce interest rates as soon and as much as the markets have been expecting.

While in the case of the US, it is partly because of a relatively stronger economy, elsewhere – especially in the UK and Eurozone – it is mainly because of concerns about inflation remaining sticky, with wage pressures continuing to remain elevated.

We heard from the ECB President on Wednesday, suggesting that borrowing costs could come down in the summer rather than in spring, while several other ECB officials have also expressed concerns about wage inflation.

Christine Lagarde is due to speak again at 15:15 GMT today, while the data highlights from the Eurozone will include the release of the ECB’s meeting minutes at 12:30 GMT.

With the ECB pushing back rate cut expectations, the single currency may well perform better against some of the weaker currencies.

But against the dollar, it will require risk sentiment to improve further before being able to hang around the current levels.

US Dollar eases, but the path of least resistance remains to the upside

The US dollar rally has stalled a little in line with a positive start to risk sentiment at the start of Thursday’s session.

Investors will be eying housing starts and initial claims on the calendar today, although these are not top-tier data releases by any means. Today’s FedSpeak will include the centrist Raphael Bostic.

The US dollar has found support in recent days on renewed concerns over the Fed’s inclination to maintain higher interest rates longer than market expectations.

This week’s rally has been triggered by Fed governor Christopher Waller. While acknowledging the positive trajectory of inflation, Waller suggested a measured approach, cautioning against any haste in considering near-term rate cuts.

He highlighted the resilience of the US economy and downplayed expectations of an imminent reduction in interest rates as a result.

We have had stronger-than-expected CPI, jobs, and retail sales reports in the last couple of weeks, defying concerns associated with interest rates at a 22-year high.

EUR/USD technical analysis and trade ideas

The EUR/USD formed a small hammer candle right at its 200-day moving average on Wednesday and climbed back above the broken support level of 1.0877.EUR/USD Price Chart

On the surface, this looks like a bullish signal and there was some follow-through during the Asian session overnight. But many bullish patterns have broken down so far this year and this could be another one.

The bulls still require a higher high to form on the EUR/USD to become confident that a bottom has been formed.

A potential rise back above 1.0950ish would be a bullish signal since for the price to get there, we will have formed a three-bar reversal.

So, a break above 1.0950 is what I am looking for to turn tactically bullish on the EUR/USD which could then pave the way for a run on stops resting above last week’s high at 1.1000.

But as long as we don’t see such a bullish reversal pattern, the near-term trend would remain bearish amid an overall positive environment for the US dollar that we have observed since the turn of the year.

Key short-term resistance is seen just above the 1.09 handle, where the backside of the broken trend line comes into play.

Aggressive bearish traders may wish to step in around these levels, while the more conservative type would prefer to see more bearish price action before committing.

For the latter group, if the EUR/USD shows a sign that the bulls have been trapped, this then maybe the trigger they are waiting for.

A potential break below that 1.0877 support could trigger a move to below Wednesday’s low of 1.0844, where some sell stops are undoubtedly resting.

Below this level, the next potential downside target could be around 1.0815ish, which was the point of origin of the last rally. The subsequent bearish target is the liquidity resting below the low of December at 1.0723.

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Disclaimer: This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of asset, is evaluated from multiple points of view and is highly risky and therefore, any investment decision and the associated risk remains with the investor.

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