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EUR/USD Deep Dive: When Will Euro Sellers Pose a Sustained Break Below Parity?

EUR/USD Deep Dive: When Will Euro Sellers Pose a Sustained Break Below Parity?

James Stanley, Senior Strategist

Euro Talking Points:

  • Tomorrow brings European inflation numbers and the expectation is for another jump, this time to 8.9% from last month’s 8.6% headline read with Core CPI expected to increase to 4% from last month’s 3.7% print.
  • The bigger question in Euro price action is if/when/how EUR/USD might finally stage a sustained break below the parity level. And this can remain pertinent in other Euro crosses, such as EUR/JPY and EUR/AUD.
  • 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.
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EUR/USD continued to stymie Euro bears, and it’s the parity level that’s at least partially to blame. That parity level is a big deal in the world’s most voluminous currency pair and it hadn’t been in-play for more than 20 years when coming into the picture last month. As said just ahead of the parity breach, that could be a tough level to breakthrough for bears, especially considering how extended the bearish trend was at the time.

Well, here we are a month later and sellers still haven’t been able to leave it in the rear view. And there’s not much by way of positive news around the Euro-zone either, making this seem more and more like a technical event that’s merely put the bigger picture trend on pause.

The big question is when or how bears might stage their re-approach. From a longer-term basis, the pair still remains oversold via RSI. The last time the monthly chart of EUR/USD was in oversold territory was in 2015, but notably the pair didn’t bottom for more than a few months after intruding on that oversold territory.

EUR/USD Monthly Chart

EURUSD monthly chart

Chart prepared by James Stanley; EURUSD on Tradingview

If EUR/USD is at Support and Oversold – Does that mean the Bearish Move is Complete?

No… lagging technical indicators are not predictive. This is why I so heavily focus on price action, which isn't predictive either, but it also removes the inherent lag of using a lagging indicator on a lagging price (which is lagging by the time you can see and register price on your screen).

The fact of the matter is the Euro sell-off, along with the USD bullish trend, both came together very, very quickly. And if a move like that is going to develop, what is it that we’re seeing? Some pretty consistent and heavy Euro selling and USD buying which, eventually, creates a very heavy short stance across the market.

And if anyone able/willing/wanting to sell has already sold EUR/USD – how will prices continue to move-lower? There needs to be more selling to bring on fresh lows, right? But, if anyone that wants to be short already is, and there’s a dearth of fresh shorts entering the market, such as we saw when prices did test below parity last month, well that can lead to a reversal.

This is the role of sentiment in financial markets

Shorts will see the move stalling and can look to close. That creates demand, which creates higher prices, and other shorts see unrealized profits being erased can be compelled to close their shorts, too, which then creates more demand and even higher prices. This is a short-squeeze scenario.

Eventually, after enough demand has filtered in, there could be reversal traders jumping into the mix, hypothesizing that a ‘low is in’ and looking to play the pair-higher, even if just for a short-term bullish breakout.

The degree to which those pullbacks will run is generally governed by just how aggressive the market is on the prior bearish theme. If it was a fleeting type of theme, then the low may actually be in, and buyers may continue to push the reversal setup. But, if there’s still an extreme, over-arching bearish backdrop on the pair – likely – sellers are standing at the wait to swat down any bullish flares that might show.

Such as what happened last week in EUR/USD. The pair pulled back and found resistance right at a significant spot of prior support, taken from support-turned-resistance at the 1.0340-1.0365 zone.

EUR/USD Weekly Price Chart

EURUSD weekly price chart

Chart prepared by James Stanley; EURUSD on Tradingview

EUR/USD: When Will Parity Break?

If the parity level is going to be left behind we’re going to need sellers to ramp up the pressure even after price drops below that parity level. Parity is somewhat of the ultimate psychological level in that price is going to seem much cheaper at .9999 than 1.0001, despite the fact that it’s only a mere two pips.

This can be a difficult equation but usually it’s going to require a push, of some kind, from the fundamental front. Given energy prices in Europe along with inflation that’s already well-elevated, and taken with the fact that the ECB doesn’t quite have the same ability to tighten policy without triggering a recession, it would seem that the potential for that fundamental backdrop continues to exist.

The bigger question is ‘when.’ For now, we may need a deeper retracement in the bearish trend to further wash out some of those longer-term shorts. This could serve to put more capital on the sidelines that could be deployed for a more extended run below parity. That could possibly set the tables for a more amicable scenario should that fundamental trigger, whatever it might be, shows up to compel that deeper sell-off.

EUR/USD Daily Price Chart

EURUSD daily price chart

Chart prepared by James Stanley; EURUSD on Tradingview

EUR/USD Shorter-Term

As more evidence of that longer-term oversold theme keeping sellers at bay, the four-hour chart has a pretty clear show of continued support at a key area on the chart. This is the zone running from around 1.0100 up to 1.0130, and this was range support before that flare last week ran up for a resistance test at 1.0365.

The fact that support re-appeared after price moved back into the range further illustrates that selling pressure drying up as price re-approached parity.

This also highlights some workable levels near-term. Range support can keep the door open for short-term bullish strategies, looking for a move back towards resistance around 1.0265-1.0275. And if price gets up there, there could be continued breakout potential, looking for a re-test of that 1.0340-1.0365 level. After that, there’s bigger-picture breakout potential.

And if this is a legitimate short-squeeze, each test of resistance could bring on another quick bullish flare as stops get triggered (stops on shorts become market orders to buy once triggered) – thereby creating a bit more bullish movement.

For that theme, I’m tracking further resistance potential around 1.0459 and 1.0600, both of which are derived from a recent Fibonacci retracement.

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EUR/USD Four-Hour Chart

EURUSD four hour chart

Chart prepared by James Stanley; EURUSD on Tradingview

--- Written by James Stanley, Senior Strategist, DailyFX.com & Head of DailyFX Education

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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