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EUR/USD Bullish Potential

EUR/USD Bullish Potential

James Stanley, Senior Strategist

EUR/USD Talking Points:

  • EUR/USD built a morning star formation last Monday and then the pair put in gains for each of the next four days.
  • That bullish run brought prices right back to a key zone of resistance. That resistance is holding for now around monthly highs; but the bigger question is whether buyers jump in to offer higher-low support, after which bullish trend potential becomes more attractive.
  • The analysis contained in article relies on price action and chart formations. To learn more about price action or chart patterns, check out our DailyFX Education section.

I’m probably as surprised to write this as you are to read it, but as we enter the week the Euro has bullish potential on the prospect of the European Central Bank hiking rates later this year.

This would be very much against the grain for one of the world’s most dovish central banks, but after seeing the Federal Reserve getting caught in a corner last year, ignoring continued jumps in inflation while instead relying on incorrect forecasts, the ECB has started to slowly open the door towards ‘less loose’ policy at some point later this year.

The ECB rate decision last week brought this to light but in reality, the move in EUR/USD was gearing up even before then. Last Monday saw the completion of a morning star candlestick pattern, which is often approached with the aim of bullish reversals.

And then the next four days were bullish with gains for each day, with prices running right back into a familiar zone of resistance that rests from 1.1448-1.1500. At this point, the high has stopped right at the prior monthly high, plotted at 1.1483. This also sets up the potential for a possible double-top formation.

EUR/USD Daily Price Chart

EURUSD daily price chart

Chart prepared by James Stanley; EURUSD on Tradingview

EUR/USD Bullish Potential: Plotting the Scenarios

First and foremost bullish breakout potential exists at the monthly high of 1.1483. But, just above that level is another spot of resistance at the psychological level of 1.1500. Likely, there’s some stops sitting above each, and because those stops would be on short positions their order logic would be to ‘buy to cover,’ which can lead to some additional topside.

So, there’s short-term breakout potential there, but that may not be the launch into a longer-term trend that many are looking for. A breach, combined with a pullback to support around current resistance could possibly be that entryway, however. And, alternatively, higher-low support potential exists at prior spots of resistance, taken from around 1.1374 or the 1.1272 level.

Given the U.S. CPI report due to be released on Thursday morning, there’s certainly some potential for motivation around the Greenback. But, perhaps the bigger question for this week is how rates markets treat the Euro and how much more they scale-up higher rate expectations around the ECB.

EUR/USD Four-Hour Price Chart

EURUSD four hour price chart

Chart prepared by James Stanley; EURUSD on Tradingview

EUR/USD Sentiment

At the time of this writing, IGCS is similarly indicating bullish potential in EUR/USD. The pair is currently showing an imbalance of retail shorts and given the contrarian nature of this indicator, that makes the long side a bit more attractive.

But, also of consideration is the recent delta, as the past week has seen a 94% increase in retail shorts to go along with a 40% reduction in longs. This is clearly the retail crowd reacting to that bullish move from last week and the re-engagement with resistance at 1.1448-1.1500, and this further highlights bullish potential in the EUR/USD pair.

To learn more about sentiment, click the link below to be taken to our guides page, from which you can request our IGCS Sentiment Guide.

EUR/USD Retail Sentiment

EURUSD sentiment

Chart prepared by James Stanley; Taken from IG Client Sentiment, DailyFX.com

--- Written by James Stanley, Senior Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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