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Talking Points:

- The ECB made no major changes at this morning’s rate decision.

- The bigger item for Forex traders is likely the continued breakdown in the U.S. Dollar, which set a fresh three-year low a few hours ago, and looks set for another fresh low later this morning.

- Are you looking to improve your trading approach? Check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

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ECB Holds Steady with No Major Changes

Coming into this week, the ECB rate decision set for this morning appeared to be a pretty big event. This was the first rate decision for the bank in the New Year, and just the second since the ECB elected to extend their stimulus program into September of 2018. But already, we had started to hear the initial rumblings of a bank looking to prepare for an exit from stimulus. When the meeting minutes from the ECB’s December rate decision showed that the topic of forward guidance was front-and-center for the European Central Bank, markets grasped on to the premise that the ECB was starting to tip their hand towards an eventual taper announcement for later this year.

This mention of forward guidance in the meeting minutes from that December rate decision helped to bring bulls back into EUR/USD, and the pair traded up to fresh three year highs just one day after those comments were released. Little has been able to slow down that bullish move over the past two weeks as buyers have remained very much in-control. Last week brought a two-and-a-half day pull-back into the pair and we pointed out a key area of Fibonacci support that buyers had begun to respond to. This support helped to hold the lows in the pair as we came into this week, at which point USD-weakness started to really take over.

On the daily chart below, we’re looking at the continued topside run towards the key level of 1.2500 in EUR/USD after last week’s check of support.

EUR/USD Daily Chart: Bulls Take Over After Last Week’s Support

EUR/USD Daily Chart with Fibonacci Support Applied

Chart prepared by James Stanley

EUR/USD Potential Support

For traders looking at taking-on bullish exposure here, current levels could prove challenging given how far away we are from prior support. Last week’s Fibonacci inflection took place off of 1.2167, and that’s more than 300 pips away from current price action. Instead, bullish approaches can look for a pullback to a shorter-term potential support level, at which point longs can be triggered when/if support does in-fact show-up. On the chart below, we’re looking at four potential areas where this might take place above that prior point of support at 1.2167.

EUR/USD Hourly Chart: Potential Supports Applied

EUR/USD Hourly Chart with Potential Supports Applied

Chart prepared by James Stanley

U.S. Dollar Crumble Continues

The big item so far this week has been another bearish extension in the U.S. Dollar’s down-trend. This move puts DXY below the psychological level of 90.00, and we’ve made a fast attempt towards a key Fibonacci level that exists at 88.42. Yesterday’s sell-off was rather aggressive, coming on the heels of comments from U.S. Treasury Secretary Stephen Mnuchin, in which he indicated that a weaker Dollar is good for the United States, and not necessarily something that the current administration is going to look to change, at least in the short-term. This helped to bring on a hastening of the bearish move after last week’s check of resistance at prior support (the December Swing Low); and this has helped to propel DXY towards the 61.8% Fibonacci retracement of the 2014-2017 major move at 88.42.

U.S. Dollar via ‘DXY’ Weekly: Bearish Extension Breaks Below 90.00

U.S. Dollar weekly chart with bearish breakdown

Chart prepared by James Stanley

Much as we looked at in the EUR/USD setup above, the primary challenge for traders looking to jump-on this trend would be one of timing. Prices remain very near multi-year lows, and we’re quite far away from any recent inflections of resistance that could help to make risk management a bit more clear. There’s been very little by way of strength since USD sank below the 90.00 level on DXY and, at this point, the most recent swing-high would be around the 91.00 level. So, rather than chasing a well-developed trend while at multi-year lows far away from any potential resistance, traders can wait for a pullback in the trend before looking to push exposure. That psychological level around 90.00 could be opportune for such an approach, as can a group of swing-lows that developed just a bit above that area around 90.30. Above that, we have the prior swing-high that showed-up at the December swing-low, around the whole number of 91.00.

Resistance showing at any of these three levels keeps the door open for short-side continuation in the U.S. Dollar’s bearish trend.

U.S. Dollar via ‘DXY’ Hourly Chart: Potential Resistance Areas Applied

U.S. Dollar hourly chart with potential resistance applied

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on Euro or the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on our EUR/USD, and U.S. Dollar pages. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

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

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