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No sooner had markets given a sigh of relief over Italy’s woes, Powell comes out swinging to rejuvenate broad dollar buying and push EUR/USD below key support.
Since the previous analysis we can safely confirm that the neckline is broken and the head and shoulders pattern has been decapitated. Now trading beneath 1.1510 resistance (previously support), momentum favours a run towards the 2018 lows.
Yesterday’s bearish engulfing candle closed below key support to take it back into the 1.13-1.15 range. Given the bearish trend structure that led us into the 4-month range between 1.1300-1.1850, we see yesterday’s breakdown as a sign its ready to retest the lows of this range.
However, we’d prefer to see prices stabilise beneath before entering short. Currently sitting on its lower Keltner band and having already printed six consecutive bearish sessions, the downside is at risk of overextension over the near-term. And, although 1.1510/26 could act as resistance, the engulfing candle high at 1.1594 could also provide adequate resistance before the next leg lower.
Taking a step back to admire the weekly chart, a bearish engulfing pattern marks a likely swing high at 1.1815. Furthermore, the reversal pattern coincides with a zone of resistance comprising of the 50-week average and 38.2% Fibonacci level. Assuming this is indeed the end of its correction, 1.13 is the next major support level for bears to challenge, which leaves around 180 pips of potential downside from current levels.
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