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James Hyerczyk

The Euro posted a dramatic turnaround on Friday, catching traders by surprise and triggering an impressive short-covering rally. Traders said the move was likely fueled by the thin volume caused by the holiday-shortened week in the United States that sent many of the major players to the sidelines.

There was some positive Euro Zone news on Friday. Euro Zone inflation accelerated faster than expected in November on a rise in food and services prices. This may have provided some comfort for European Central Bank policymakers even if some factors pushing up prices may be only temporary.

On Friday, the EUR/USD settled at 1.1018, up 0.0007 or +0.07%.

Annual inflation jumped to 1% this month from 0.7% in October, outpacing expectations for 0.9%, as volatile food prices rose more than predicted, data from Eurostat showed on Friday.

Core inflation excluding food and energy prices picked up to 1.5% from 1.2% a month earlier, beating expectations for 1.3%. An even narrower gauge, which also excludes alcohol and tobacco prices, accelerated to 1.3% from 1.1% ahead of forecasts for 1.2%.


Daily Technical Analysis

The main trend is down according to the daily swing chart. However, momentum may be getting ready to shift to the upside with the formation of the closing price reversal bottom on Friday at 1.0981.

This chart pattern won’t change the main trend to up, but it could lead to a 2 to 3 day counter-trend rally.

The main trend will change to up on a trade through 1.1097. A move through 1.0981 will negate the closing price reversal bottom and signal a resumption of the downtrend.

The main range is 1.0879 to 1.1179. Its retracement zone at 1.1029 to 1.0994 is controlling the near-term direction of the EUR/USD.

The short-term range is 1.1097 to 1.0981. Its retracement zone at 1.1039 to 1.1053 is the first upside target.


Short-Term Outlook

We don’t know what Friday’s price action means yet. However, we suspect it was a trader or traders taking advantage of the weak post-holiday volume.

If there is a follow-through to the upside, we’re likely to see sellers re-emerge on a test of the short-term retracement zone at 1.1039 to 1.1053, since the main trend is down.

The key to the next major move in the EUR/USD is likely to be determined by trader reaction to the main 50% level at 1.1029 and the main Fibonacci level at 1.0994.

An upside bias could develop if buyers can sustain a rally over 1.1029. The downside bias is likely to resume on a sustained move under 1.0994.

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