How Big will the Correction be?

EUR/USD Technical Analysis – 8 May 2017

EUR/USD spot: 1.0955

Support: 1.09 1.0826, 1.0779

Resistance: 1.1024, 1.1125, 1.1276

Strategy:

  • Short above 1.095
  • Profit targets: 1.09, 1.0826
  • Stop loss: 1.1024
  • Alternative strategy: Buy a break of 1.1024, and hold as long as momentum continues.

Last Week’s Action

The EUR/USD has traded in a tight channel over the past two weeks, with the Euro steadily gaining ground. Last week all eyes were on the Fed and the French election. The Fed added nothing new to the narrative and Macron maintained his lead in the polls, and so there was no reason for a change in trend.

The USD ended the week at its weakest, despite strong employment data.

Where to Now?

There is a sense of euphoria in European markets today. However, the market has been expecting a 'buy the rumor sell the fact' scenario for the Euro after Macron's victory in France. That, and the fact that the Euro is overbought, means there are a lot of short Euro positions in the market.

The market is expecting a rate hike in the US in June. Any data that suggests that may be moved out to a later date would lead to USD weakness. The big number investors will be watching this week will be CPI data on Friday.

The market is therefore heavily geared toward a correction in the Euro, this week. Any news that is bullish for the Euro, or bearish for the USD is likely to send the euro surging toward 1.12.

Weekly Trend Intact, but Overbought

The Euro is very overbought and a pullback to 1.0826 and possible even 1.0716 would actually help the Euro’s advance in the longer term. If there are not enough sellers, then Initial resistance has been established at 1.1024, and if that gives way 1.1125 is the bigger target.

While the shorter-term moves will be dictated by sentiment and data, the longer-term Euro bull trend is still very much intact.

2017-05-08 eurusd-weekly-chart

EUR/USD Weekly chart

Short-Term Correction Under Way

On the short-term chart, the Euro is correcting after a break to new highs. The immediate target is 1.09, a trendline that held over the last 2 weeks. It’s likely that that will give way, which will open that way for the gap to close at 1.0775. At those levels, traders should start looking for another buying opportunity.

On the upside, once 1.1024 gives way there is very little technical structure to show the way, but the initial target will be 1.1125. A momentum oriented approach should be used for longs above 1.1024

2017-05-08 eurusd-4h-chart

EUR/USD 4-Hour Chart

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