The bearish trend which has dominated recent days accelerated yesterday, given a strong and sudden tailwind by the Fed’s hawkish tilt yesterday resulting in stronger expectations of further rate hikes in the near term. This renewed directional certainty and the relative weakness of the Euro has put the EUR/USD currency pair in renewed focus, with the market waiting to see whether the Euro will claw back some of yesterday’s losses, or whether this currency pair will soon see fresh lows.
EUR/USD Fundamental/Sentimental Analysis
This is driven much more by the US Dollar than the Euro, and this is quite typical for the Forex market, which sees about 75% of its volume from exchanges involving the greenback. The US Dollar just got a major boost which pushed it up to a fresh seven-week high after the Fed not only hikes rates by 0.25% as expected at its policy meeting yesterday, but also used such hawkish rhetoric on inflation that the CME FedWatch tool now shows the market pricing in a 53% probability of the Fed making a further 0.25% rate hike at its next meeting in October.
The US Dollar Index has lost a little ground in the past few hours – not much – but this could be significant technically which I will deal with in the next section. Sentiment on the USD is freshly bullish generally.
Turning to the Euro, fundamentals and sentiment are much more mixed compared to the US Dollar. The ECB is on a path of rate hikes, but elevated energy costs, and weak European confidence data keep sentiment on the Euro shaky. This supports a bearish take on this currency pairing.
EUR/USD Technical Analysis
We saw the price fall quite strongly and quickly after the Fed meeting yesterday, but the price action in recent hours seems to show the price finding support at 1.1458. I take this support level seriously as it seems confluent with the DXY (US Dollar Index) resistance at 100.00 which has just been rejected by the greenback. These are bullish indications, boosted by the U-shaped price action of recent hours which suggests an upwards price movement is on the way.
A key test for bulls will be whether 1.1487 can be overcome, as this is the nearest resistance level. The level above that at 1.1525 looks extremely crucial.
The level of least resistance looks upwards right now, as there are three tightly packed support levels clustered just below the current price action. However, if the price continues to hold below 1.1487 for several hours now, that will suggest that the outlook remains bearish.
My Take on EUR/USD
I see a move higher in the short term and a test of 1.1487. I think this level will probably break and the price will rise higher. However, I expect the bearish trend to then reassert itself once the price reaches the big round number at 1.1500 or the defined horizontal resistance level not far above at 1.1525, and from a clean rejection in that area, a more confident short trade entry becomes possible.
There might be scope to scalp higher on the move up. I am more confident about long trades in the very short term because I see the resistance level in DXY holding at 100.00 – and that is a big round number as well as a key resistance level suggested by historic price action.
Review, Support & Resistance Levels .
In my previous EUR/USD signal on 2nd September no trades were triggered.
Risk 0.75%.
Trades may only be taken prior to 5pm London time today.
Short Trade Ideas
Short entry following a bearish price action reversal on the H1 timeframe immediately upon the next touch of $1.1487, $1.1525, or $1.1563.
Put the stop loss 1 pip above the local swing high.
Adjust the stop loss to break even once the trade is 20 pips in profit.
Remove 50% of the position as profit when the price reaches 20 pips in profit and leave the remainder of the position to ride.
Long Trade Ideas
Long entry following a bullish price action reversal on the H1 timeframe immediately upon the next touch of $1.1458, 1.1435, or $1.1420.
Put the stop loss 1 pip below the local swing low.
Adjust the stop loss to break even once the trade is 20 pips in profit.
Remove 50% of the position as profit when the price reaches 20 pips in profit and leave the remainder of the position to run.
The best method to identify a classic “price action reversal” is for an hourly candle to close, such as a pin bar, a doji, an outside or even just an engulfing candle with a higher close. You can exploit these levels or zones by watching the price action that occurs at the given levels.
There is nothing of high importance scheduled today concerning either the Euro or the USD.
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