EUR/USD: Increasing Risk of Pull-Back but Medium-Term Still Looks Promising

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- Pair is showing signs of correcting in short-term

- Further out some strong bullish signals persist

- Key reversal underpins the lows and longer-term change

The start of June has been good for the Euro-to-Dollar exchange rate: the pair has risen almost two cents since touching 24-month lows at the end of May. But now there is an increasing risk of a pull-back before the pair goes any higher.

EUR/USD looks to have formed a bearish 2-bar reversal pattern (circled in red in the below chart) at the recent highs. 2-bars are composed of a long green up candle immediately followed by a similarly long red down candle. They are a short-term negative omen. By short-term we mean l between 1-5 days.

The pattern is accompanied a similarly bearish signal from the RSI momentum indicator in the lower pane which has exited the oversold zone above 70 (circled) at the same time as the formation of the 2-bar. This is a signal to sell the asset according to the indicator’s inventor Welles Wilder.

From here we see a growing risk of a correction down to 1.1200 and the top of the channel the pair recently broke out of. This is also the level of the 50-day moving average (MA) which is also expected to provide a floor of support.

Medium-Term Outlook Bullish

Despite expectations for a potential pull-back down to the 1.1200 floor, in the medium-term the technical outlook is more bullish than bearish.

The pair’s strong 2-cent move higher in early June has been accompanied by a game-changing breakout above a long-term falling channel.

For a long time the pair obediently conformed to the parameters of the channel but at the start of this week it broke and closed above the upper channel line.

This was an important indicator of a major change in the medium-term trend, by which we mean the trend over the next 1-3 weeks.

In the case of EUR/USD it means the pair has probably started a new bullish phase, and suggests an eventual follow-through higher to a zone between 1.1338 to 1.1371, at which level it is likely to encounter resistance and stall.

This ‘resistance zone’ is made up of the R2 monthly pivot - a technical level used by professional traders to gauge the trend and fade up moves - and the 200-day moving average (MA), both of which are likely to present obstacle to the uptrend.

Whilst the exchange rate could break above them, it might not do so immediately, and a pull-back or move sideways is highly probable.

The original bullish signal which began the recovery was the ‘key reversal’ bar which formed at the May 23 lows.

Key reversals are rare but potent signals of long-term change. They occur at major lows or highs when the market troughs or peaks and then reverses trend in a day. They can be long-term markers of change.

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