EURO USD BIASED TO THE DOWNSIDE

EURO USD CONSOLIDATION BREAKOUT- USD GAINS AHEAD


The current indecision of this pair can be partly explained by the limited activity in the market in general, low liquidity and investigations into illicit trading practices. However, there is also an explanation based on the natural Price Action movements that can be seen throughout the currency market. The chart below shows that the currency is actually above the Resistance of a large Pennant setup on the Weekly Chart that was formed after sharp gains for the USD during the Financial Crisis of 2008. The current position, seen on the right-hand side of the chart, shows that a smaller Pennant has also been formed after a rally to this area ended in October of 2013.



WEEKLY CHART

Source: FXCM Marketscope




















Consolidations such as these tend to be formed after sharp, fast movements that end trends or when a currency pair has reached its Weekly or Monthly Range. As the market moves sideways inside the Consolidation, it will form smaller Consolidations, Double Tops/Bottoms and False Breakouts that lead to reversals to the other end of the formation. In the chart below, we can see that there were two previous small Consolidations at the Resistance of the larger Pennant just before the respective downtrends took them back down to Support.


WEEKLY CHART


Source: FXCM Marketscope





















The Support of this latest Pennant has also been broken, but is still above the Resistance of the larger Pennant. This presents two possible scenarios that can unfold over the next few months. The breakout short could continue and taking us back down to the Support area at 1,2280. Along the way, several important Support points would be hit that traders can use for profit taking.


WEEKLY CHART

Source: FXCM Marketscope





















On the other hand, since the breakout has not yet taken us back below the major Resistance, we could have an unexpected rally that uses this Resistance as Support to start a breakout long. Several past Resistance areas would be hit as the Euro strengthens.


WEEKLY CHART

Source: FXCM Marketscope





















Ultimately, the long-term direction will be determined by the respective economic policies and market expectations regarding the underlying economies. Current monetary policy has been very dovish for the respective monetary authorities but the recent cut in rates by the European Central Bank has now given the US Dollar the edge in terms of interest rate differentials. If this bias towards the Greenback continues, then the short, medium and long-run trends are likely to be on the downside. With the economy in the Eurozone continuing to struggle more than its American counterpart, short positions are likely to be the better choice of traders from this point onward.


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Duane Shepherd 
(M.Sc. Economics, B.Sc. Management and Economics)
Currency Analyst/Trader
Contact: shepherdduane@gmail.com
Twitter: @WorldWide876
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