To learn more click here
The EUR/USD broke out to the upside of a triangle chart pattern on the daily chart. The chart pattern suggests that the Euro could rally as high as 1.2723 versus the U.S. Dollar over the near-term.
According to the theory of technical analysis of chart patterns, the triangle chart pattern is considered a non-trending pattern. The gradual narrowing of the support and resistance lines typically leads to a sizable breakout on increased volatility because of the compression of the recent trading ranges.
At the mid-session, the Euro is showing the results of pent-up demand inside of the triangle based on the size of today’s move and the increased volatility. Besides breaking through the downtrending resistance line, the market has also taken out the recent tops at 1.2385 and 1.2443.
Based on the multi-month range of 1.2747 to 1.2042, a key retracement zone was formed at 1.2394 to 1.2478. Today’s strong combination of short-covering and fresh buying also helped the market regain the 50% price level at 1.2394, setting up the currency pair for a challenge of the 61.8% or Fibonacci price level at 1.2478.
Volatility could increase following a breakout through this upper level since the remaining short traders will be forced to cover.
Today’s strong rally is not a sudden event. This breakout took weeks to form following friendly comments from European Central Bank President Mario Draghi. On July 24, he pledged to do “whatever it takes” to preserve the Euro. For several weeks, the market formed a support base as investors reflected on the actual meaning of Draghi’s comments.
Some wanted to see immediate action by the ECB, but this met criticism. Finally, as European leaders gathered to prepare for another decision regardingGreecelater this week, word leaked that a plan was being worked to begin buying Spanish and Italian bonds. This news helped spike the Euro, setting the tone for today’s expanded range.