EUR/USD made a sharp reversal on Friday to wipe a significant portion of early week losses. The momentum created shows potential for further gains. However, I expect the pair will pull back in the session ahead as some important resistance is in play.
It led to a bearish engulfing candle on the daily dollar index (DX) chart and a morning star reversal pattern on a daily chart for EUR/USD.
The candle on DX for Friday nearly fully wiped out four days of gains. There is a bit of divergence in the inverse correlation between it and EUR/USD. Specifically, EUR/USD only erased about half of the early week losses on Friday’s recovery.
As such, the DX daily chart paints a much stronger case for continued dollar weakness. However, DX is near support at a horizontal level that held it lower in early May and higher in the late month.
I don’t think a catalyst is in place for an early week break down which is why I expect the dollar can bounce a bit in the session ahead.
The above 4-Hour chart shows a confluence of resistance overhead. It comes from the 100 moving average and the upper bound of a declining trend channel.
The 200-period moving average is slightly above the 100 to offer additional resistance. Currently, it resides at 1.1193.
Going into the North American session, the 4-hour candle close will be important. A close near session lows would result in an evening star pattern which would encourage New York traders to try a short position.
On an hourly chart, EUR/USD has been holding above the 200-period moving average. Since bouncing from it, the pair has climbed back above a horizontal level at 1.1170.
Overhead resistance at 1.1183 looks quite strong to me, considering the prior failure and the presence of the trend channel mentioned above.
The 100-period moving average seems to be converging to a horizontal level at 1.1150. I think this area offers strong support in the event of a decline.
Jignesh has 8 years of expirience in the markets, he provides his analysis as well as trade suggestions to money managers and often consults banks and veteran traders on his view of the market.