EURUSD Backing-and-Filling, 'Bull-flag' Coming into View
- EURUSD chopping lower in constructive fashion, building a ‘bull-flag’
- Probe of confluent support could mark the end of the correction
- On a bull-flag breakout, the US Dollar Index (DXY) to probe deeper into long-term support
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Last week, trading in EURUSD was dominated by choppy back-n-forth price action. On three different days the euro traded below the prior week’s low of 11689, and each time it rejected lower prices and closed the session with a bounce. Overall, since topping out around the 2010 low near 11900 the euro has been constructively working off overbought conditions. This is viewed as a positive for the intermediate-term outlook, but still holds a bearish tilt in the very short-term. While the current configuration could be considered a valid ‘bull-flag’, some more chop within the confines of the descending channel (‘bull-flag’) will do some good in terms of building a stronger, more mature pattern. A drop to the April trend-line and lower parallel near the 2016 high of 11616 would make for a good final test of confluent support within the bullish sequence. In the event we see a breakout above the upper parallel, focus will quickly shift towards 11910 and a higher high towards the 2012 low at 12041, and possibly higher.
Turning focus to the US Dollar Index (of which the euro holds a ~57% weighting), the DXY is trading in a major long-term zone of support. It’s towards the upper end of this zone, so a probe even deeper into support would be the outcome on another surge in the euro. The dollar has few backers these days, with bearishness clearly escalating to a point where the scale may soon tip in favor of a reversal. The one-sided trade into major long-term support could soon present a material, tradeable low in the not-too-distant future. This of course means the euro will get turned upside down and set in motion a decline unlike anything we’ve seen in recent months.
US Dollar Index (DXY): Monthly
The bottom line for this coming week – EURUSD looks poised to continue choppy-trade with a slightly bearish bias within the confines of the channel, perhaps only providing the nimble short-term trader with opportunities to fade minor price swings. However, in the event we see a firm break above the upper parallel of the maturing bull-flag, the end of the correction will likely be over and another (possibly final) surge higher for the single-currency could be in store. To undermine this outlook, it would require a breakdown below the before-noted support surrounding 11600. At that juncture, a broader rebound in the US dollar will likely be in the works.
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---Written by Paul Robinson, Market Analyst
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