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Jignesh Davda

Where Does EUR/USD Go From Here?

After spending a week battling major overhead resistance, EUR/USD has broken upward to signal a technical breakout. The question at this stage is whether the bullish break is signaling a long-term change in trend.

EUR/USD has not just rallied above 1.10 which is considered a psychological level. It has also broken higher from a downtrend channel that had encompassed price action since late June. in this context, today’s technical development is significant.

What might be a bit surprising is that the technical break occured even though there are still several major risk events that create uncertainty.

For starters, the US-China trade war remains a concern. There have been some developments, however, things are still very much in the air while high-level talks take place this week.

Adding further uncertainty is how things will play out with Brexit. A deal should be reached by the EU summit next week for the UK to leave the EU in an orderly fashion by the October 31 deadline. It doesn’t look like the UK is anywhere close to reaching a deal, putting a no-deal scenario back in play.

It’s also not entirely clear how US monetary policy will evolve from here. The Futures market is nearly fully pricing in another rate cut this month. Meanwhile, yesterday’s Fed minutes highlighted how divided policy members are on how perceived risks will impact the economy. Considering the recent string of weak data, it certainly seems another cut is in the cards. But it will be important what the market thinks will happen after that.


Technical Analysis

As mentioned, there has been a technical break in EUR/USD and it has been significant.

EURUSD Daily Chart

If we see a pullback at this stage, the breakout area, roughly around 1.10, should be supported to assert the view of a technical break.

Upside resistance for the pair is found at 1.1060. This level acted as support in August and resistance in early September. Further, the 50-day moving average has converged toward the level to add some confluence.

EURUSD 4-Hour Chart

There is a bit of a divergence playing out with the dollar index (DXY). The index is still holding above the 20-day moving average and the equivalent rising trendline from late June lows. For this reason, I think it’s important to view further price action in assessing if the technical break is in fact signaling a broader trend reversal.

Bottom Line

  • A technical break in EUR/USD could be signaling a trend reversal.
  • The prior resistance area around 1.1000 is now seen as major support.
  • There is a resistance confluence at 1.1060 which seems like the next major target for the pair.
  • A slight divergence is playing out in the dollar index. A technical break lower in DXY would provide confirmation that EUR/USD has put in a near-term bottom.
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