EUR/USD: Risk of a short-term reversal – Rabobank

In view of Piotr Matys, EM FX Strategist at Rabobank, the recent price action in EUR/USD could be calm before the storm as sharp move may unfold in the coming days/weeks. 

Key Quotes

“Admittedly EUR/USD has been relatively stable trading in the 1.16 and 1.21 range since July. However, this perceived stability resulted in a head and shoulders pattern possibly forming on the daily chart with the August high at 1.1910 as the left shoulder, the year-to-date high at 1.2092 as the head and the recent top at 1.1880 as the right shoulder.”

“Given that head and shoulders is a reversal pattern, the euro may struggle to hold to its impressive year-to-date gains versus the US dollar.”

“The trendline support at 1.1672 represents the neckline, which is crucial juncture. A break below the neckline would set in motion retracement with the 1.1489/80 as an initial target.”

“Even more bearish target of 1.1252 can be obtained by measuring the distance between the head at 1.2092 and the neckline at 1.1672, but such text book targets are seldom hit.”

“We often look for potential catalysts and ECB’s meeting next week is a major risk event for the euro. Progress on US tax reforms and who could be nominated by President Trump to lead the Fed will also set the tone for EUR/USD.”

“It is important to emphasise that even if such bearish scenario unfolds, it should be interpreted as a short-term correction rather than a major shift in market sentiment, which will be mainly influenced by economic fundamentals, monetary policy and politics.”

“To void this bearish technical outlook EUR/USD would have to rally well above the October high at 1.1880.”