EUR/USD Reaction to 1.1303 – 1.1345 Sets Short-Term Tone

The Euro is up late Wednesday, supported by a weaker U.S. Dollar and strong domestic inflation data. Meanwhile, volume is on the light side ahead of tomorrow’s European Central Bank (ECB) monetary policy meeting and Friday’s U.S. Non-Farm Payrolls report.

At 19:14 GMT, the EUR/USD is trading 1.1301, up 0.0036 or +0.32%. The Invesco CurrencyShares Euro Trust EFT (FXE) is at $105.05, up $0.38 or +0.36%.

Early in the session, the single-currency rose for a third consecutive day as Euro Zone Inflation jumped to a new record high last month. That fueled bets the European Central Bank could raise interest rates sooner than expected.

Later in the session, the greenback weakened against the common currency as data showed a drop in U.S. private sector employment in January due to the increase in COVID-19 infections. The news helped ease expectations the Federal Reserve would announce a large interest rate increase at its policy meeting in March.

Daily Swing Chart Technical Analysis

The main trend is down according to the daily swing chart, however, momentum has been trending higher since the formation of the closing price reversal bottom on January 28.

A trade through 1.1122 will signal a resumption of the downtrend. A move through 1.1483 will change the main trend to up.

The short-term range is 1.1483 to 1.1122. The EUR/USD is currently testing its retracement zone at 1.1303 to 1.1345.

Short-Term Outlook

The short-term direction of the EUR/USD will be determined by trader reaction to 1.1303 to 1.1345.

Bearish Scenario

A sustained move under 1.1303 will indicate the presence of sellers. If this move creates enough downside momentum then look for the selling to possibly extend into 1.1226.

Bullish Scenario

A sustained move over 1.1345 will signal the presence of buyers. If this move generates enough upside momentum then look for a possible acceleration to the upside with 1.1483 the next major upside target.

Side Notes

The EUR/USD is currently testing a key retracement zone at 1.1345 to 1.1303. Since the main trend is down, sellers may try to form a potentially bearish secondary lower top.

If successful, sellers may try to drive the EUR/USD into a minor retracement zone at 1.1226 to 1.1202. Aggressive counter-trend buyers could come in on a test of this area. They are going to try to form a potentially bullish secondary higher bottom.

The first rally following a steep sell-off is usually short-covering. If the market is getting ready to turn higher then buyers should come in on the next break.