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EUR/USD Volatility Ahead- Relief Rally Looks to ECB for Fuel

EUR/USD Volatility Ahead- Relief Rally Looks to ECB for Fuel

Talking Points

  • Euro rally off key support at risk into ECB
  • Updated targets & invalidation levels
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EUR/USD 240min

EUR/USD 240min Chart

Technical Outlook: Therebound off the lower median-line parallel of a modified pitchfork formation dating back to the yearly highs shifts the focus higher in EURUSD with the advance eyeing a near-term resistance confluence just above the 1.08-figure. A newly identified median-line formation off the lows could be in play here but it’s too soon to rely on. That said, the immediate risk is for a pullback after tagging the upper parallel earlier in the week and we’ll be looking for a move lower to offer more favorable long-entries.

Interim support rests with the January low at 1.0711 backed by 1.0650/60 & the 1.06-handle – both areas of interest for exhaustion / long-entries. A breach above the March lows at 1.0821 is needed to keep the long-bias in focus targeting the 2016 open at 1.0872 & more significant resistance into 1.0931/37. It’s worth noting that from a seasonality perspective, December is a bullish month for EURUSD with the pair gaining in three of the past four years and five of the last eight overall.

Heading into tomorrow’s highly anticipated European Central Bank (ECB) rate decision, the risk remains weighted to the topside while within this near-term ascending formation. Although the Governing Council is expected to retain the zero interest rate policy, market participants are anticipating an extension to the QE program beyond March 2017 accompanied by an adjustment to the Capital Key (guidelines for asset purchases).

  • A summary of the DailyFX Speculative Sentiment Index (SSI) shows traders are long EUR/USD- the ratio stands at +1.12 (53% of traders are long)- weak bearish reading
  • Long positions are 6.4% higher than yesterday but 16.8% below levels seen last week
  • Short positions are 2.5% lower than yesterday and a staggering 38.4% above levels seen last week
  • Market participation has continued to build with open interest up 2.1% from yesterday and 4.6% above its monthly average.
  • While the current SSI profile remains bearish, it’s important to note that the pullback in long positioning from the November extreme of 2.55 has been accompanied by a broader turn in the exchange rate and a flip to net-short in the coming days could invalidate the near-term bearish outlook. That said, I’ll be looking for a continued build in short positioning to suggest a more significant low may be in place.

Relevant Data Releases

Looking for trade ideas? Review DailyFX’s 2016 4Q Projections

Other Setups in Play:

---Written by Michael Boutros, Currency Strategist with DailyFX

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