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Jignesh Davda

Double Top Pattern Potential Remains

EUR/USD has fallen into a range after hitting fresh three-week lows earlier in the week. The pair is trading in around support that held it higher in late October and catching a bit of a bid ahead of the US session on Thursday.

After failing at 1.1175 resistance twice over the past few weeks, the currency pair is at risk of triggering a double top pattern. A sustained break below 1.1072 will offer a signal.

The pair is not showing much volatility despite a boost in risk sentiment. The risk-on trade is seeing some renewed positive sentiment after China said that the first phase of a trade war deal with the US is close to completion.

The EU commissions released updated economic forecasts for the euro zone which offered a mixed message. GDP for this year is now expected a tick lower at 1.1%. For next year, the forecast has been revised a tick higher to 1.3%. Inflation expectations were left unchanged.

The same risks were highlighted as in prior communication. Uncertainties related to Brexit and the US-China trade war and risk of a slow recovery in the emerging market economies.


Technical Analysis

The dollar is recovering which is causing an impact on all of the major currencies. For that reason, I”m keeping a close on the US dollar index (DXY).

DXY has been bouncing from its 50-week moving average but was blocked by resistance yesterday from the spike high posted during the Fed meeting last week. The index is seen attempting to test the level once again.

EURUSD Hourly Chart

This dollar strength might translate into further downside for EUR/USD. If DXY takes out the Fed-meeting inspired high, it could trigger the mentioned double top pattern in EUR/USD.

While such a scenario would offer a rather strong sell signal, I think it is important to bear in mind the strong performance the exchange rate had in October. This typically accompanies demand on dips in the following month. For this reason, I have some reservations about trying to play a double top pattern, if it comes into play.

Bottom Line

  • EUR/USD is consolidating at a support level that could trigger a double top pattern if triggered.
  • A strong dollar is weighing on the pair.
  • The dollar index bounce has paused near resistance from a spike high posted at the Fed meeting last week.
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