Alternative strategy: Buy a break of 1.1284 if the breakout level is retested and holds.
Last Week’s Action
A weak performance by Theresa May’s Conservative Party in the UK general election rocked currency markets last week. Leading up to Thursday the Euro was already drifting against the Dollar. The Pound fell on Thursday as results began to come in, which weighed further on the Euro – in fact all European currencies were weaker last week.
The ECB upgraded their forecasts for growth, but didn’t seem to be in a rush to taper their quantitative easing programs. European data was mixed, and if anything, weaker than traders had hoped for.
US data including the PMI, manufacturing and productivity data, was in line to slightly weaker than expected.
Strong resistance has now developed around 1.1284, which will be the key level on the upside this week.
Where to Now?
This week’s price action will be driven by the USD with the main event for the week is the FOMC rate decision due on Wednesday. The market has been pricing in a small chance of no rate hike this week, though that now seems to be very unlikely. The key will be the language regarding the Fed’s actions going forward.
In the US we will see PPI, CPI, Retail sales, Empire and Philadelphia manufacturing data and employment data. These releases will only affect the market if there is a large surprise. There is also some room for a surprise from EU data, in particular Eurozone industrial production and trade balances.
Waiting for the Next Move
The Euro Dollar is consolidating, but may still pull back further. The longer-term targets remain at 1.1428 and 1.16, but may take some time. USD fundamentals will probably drive the next move – either a deeper pullback or a rally to 1.1428.
The fundamentals haven’t changed, but Euro bulls are now fully invested, so it may take a new catalyst to trigger the next leg higher.
EUR/USD Weekly Chart – A bull flag or a top?
USD Fundamentals will Dominate this Week
The Euro has traded sideways since Macron’s victory in the French Presidential election. After failing to break higher than 1.1284 three times last week, the Euro drifted lower. It has now rebounded but may encounter resistance at 1.1238, a previous pivot level and a 62.8% retracement of the selloff.
If the Euro fails at 1.1238, all eyes will be on support between 1.1160 and 1.1167. If those levels fail to hold, we will be looking at a deeper correction. It’s difficult to place a target on how far back the Euro may retrace, so we will have to watch the price action.
EUR/USD 4-Hour Chart – Strong resistance at 1.1284
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