EUR/USD: Now Could Be A Good Time To Buy The Dip

The most popular currency pair amongst Forex traders has been on a downward move over the last few weeks as investors continue to speculate one whether or not the US Federal Reserve is going to increase interest rates before the end of the year.

At the moment, it appears as though investors may not have to wait for long before seeing an uptick in interest rates after Janet Yellen’s latest Federal Reserve comment suggested that January could be the time investors have been waiting for. However, most investors had been expecting a December hike. This is probably why the USD appears to have been continually strengthening against major currencies over the last few weeks.

However, this might yet have created a perfect opportunity for bullish traders to act, especially those fancying a rebound on the most popular currency pair in forex trading, the EUR/USD. Based on recent forecasts, everything seemed to be pointing towards a Strong Sell sentiment, yet the pair just touched a new low since April this year.

The Strong Sell forecast had also been compounded by the fact that the US celebrated Thanksgiving on Thursday while markets closed early on Friday. This meant that no economic numbers were expected till this week while Europe had seen some major announcements including the release of the German GFK confidence survey. This could have pushed the EUR/USD currency pair towards the 1.0500 mark by the end of the week. However, after the US Federal reserve failed to confirm the increase of interest rates in December, this could give the EUR/USD bulls a lifeline.

The EUR/USD is the most volatile currency pair and this explains why players seeking to broker forex trading activity on their platforms feature it amongst their trading instruments across the board. This also explains why, even given the current circumstances, it is never certain on which direction the pair would take in the coming weeks and months. Nonetheless, a major economic event such as a postponement of an uptick in US interest rates would definitely tilt the balance, and that’s where those who get it right are likely to make a lot of money.

So how exactly should you trade EUR/USD before the end of the year?

From a technical perspective, the EUR/USD currency pair is currently on a downward trend trapped within the lower Bollinger band and the median line. This indicates that the pair has been oversold over the last few weeks. If the exchange rate of the pair does eventually touch the lower Bollinger band, then that would signal a major turning point which could see the pair rebound and go on an upward run.

The Chande Momentum Oscillator also indicates that the downward momentum is currently slowing down, in which case an upward case can be made within the next few days/weeks.

The Downside Case

After breaching the 1.0600 mark, the next target for the bears appears to be the 1.0500 mark. This looked very achievable in the next few days last week until the US Federal Reserve Chair indicated that interest rate hike would not come within the month of December.

In addition, with trading volume getting slimmer and momentum waning, the bears might yet decide to cover their positions especially given the fact that the EUR/USD pair just reached a new 7-month low. As such, a continuation of the current anxiety with regard to the increase in US interest rates might play to the hands of the EUR/USD bulls.

The Upside Case

The current scenario is well set for the bulls to capitalize. It is what price action traders refer to as buying the dip (the opposite of selling the rally). The exchange rate just hit a new multi-month low and the bears appear to be cashing in their positions as momentum and trading volume continue to decline.

This is a clear signal of a possible reversal from a price action trading perspective. In addition, there is still some strong belief that the Federal Reserve may choose to wait until next year before increasing interest rates while others believe that any possible increase has already been priced into the pair.

This provides an added impetus necessary to trigger the awaited U-turn in overall market sentiment on EUR/USD as the Buy side market looks to pounce.

The combination of these factors could see the pair rebound back to hit the 1.0800 mark by the end of the year.

Conclusion

The bottom line is that technically, the USD is clearly struggling to hold on the strength it has shown against the EUR over the last few weeks. Nonetheless, the green buck seems to have a strong backing from a fundamental perspective when compared to the EUR, but after yesterday’s comment from Janet Yellen, the EUR/USD bulls could now be holding the upper hand.

The recent downward movement also appears to have hit a crucial support level, which if activated could see a major rebound in the exchange rate of the pair.