Euro-Dollar Resilience Raises Possibility of Trend Reversal, Analysts Say

- EUR/USD charts giving off reversal signals
- Recovery of 1.1780 may signal turnaround
- But EUR still lacking fundamental catalyst
- As Fed, USD strength threaten to scupper

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The Euro-to-Dollar rate has extended its rebound from new year-to-date lows and reversal signals coming off the charts have prompted some analysts to suggest it could now be contemplating at least a partial recovery of 2021’s losses.

Europe’s single currency softened slightly in the Wednesday session but remained within arm’s reach of highs around 1.1765 that were seen in the prior session when the Dollar ebbed and stock as well as commodity markets drew lines under last week’s losses.

Euro-Dollar’s recovery comes with the charts giving off reversal signals, indicating this week’s price action could yet transpire to be the tailend of its lengthy correction from January’s highs above 1.23, also the Euro’s highest levels since early 2018.

"Bullish divergence" between the EUR/USD and its relative-strength-index (RSI) measure of momentum is one such signals and has resulted from the increasingly glacial pace of the Euro’s earlier fall, which lifted the RSI even as the Euro inched toward and eventually set new lows for 2021.

“EUR/USD’s low of 1.1665 was not confirmed by the daily RSI and the market is correcting higher. In fact it is possible that this may be a falling wedge reversal pattern,” says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

Above: Euro-Dollar rate shown at daily intervals with top of prospective falling wedge pattern marked by downward sloping trendline, with rising relative-strength-index-measure of momentum in lower pane.

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The above referenced bullish divergence has also been accompanied by what looks to be a “falling wedge pattern” on the charts; another indicator of a possible trend change following what has been a resilient performance from the Euro-Dollar rate during recent weeks.

“This will only be confirmed on a close above the downtrend at 1.1780,” Jones says.

Bullish divergence typically cultivates a period of consolidation but can also indicate that a trend change is afoot, while a “falling wedge” often signifies the resumption of an earlier trend during periods of consolidation.

“Price action is expected to resolve in the direction of the prior uptrend as part of the continuation theme,” says George Davis, chief technical strategist at RBC Capital Markets. “The price objective is the height of the wedge from its widest point, projected from the breakout point.”

Above: RBC Capital Markets graph depicting falling wedge reversal pattern.

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Falling wedge patterns slant against prior uptrends and reveal themselves in a series of lower lows and lower highs, with the gap between the highs and lows narrowing progressively as the pattern develops, according to a glossary of technical analysis terms written by RBC’s Davis.

Euro-Dollar’s tentative rebound and the signals from the charts suggest it may be in the process of bottoming, although recent price action has been largely the result of twists and turns by the Dollar and the U.S. currency itself could yet stage a reversal of its own.

"A firmer rally back toward 1.1800 that sticks post- Fed Chair Powell’s speech on Friday is needed to suggest we have put in the lows (more about the highs in the US dollar)," says John Hardy, head of FX strategy at Saxo Bank.

“Until then, the 1.1600 and 1.1500 levels are potential targets to the downside,” Hardy adds.

While the Dollar has ebbed this week following strong earlier gains over many currencies, this Friday’s speech from Federal Reserve Chairman Jerome Powell to a conference of the world’s central bankers in Jackson Hole, Wyoming could put a floor under the greenback.

A range of analysts have suggested the coronavirus’ renewed encroachment on some parts of the world, and its recently increased momentum in others, will lead the bank to be more cautious about winding down its quantitative easing programme in a widely anticipated tapering process.

Above: Euro-Dollar rate shown at weekly intervals alongside Dollar Index.

However, minutes of the Fed’s July meeting indicated the process could begin before year-end and if Chairman Powell sticks to that script in any policy relevant remarks made Friday, then the Dollar might find itself better supported and this could leave the Euro-Dollar rate struggling.

“With the ECB sidelined, the outlook for US monetary policy and macro developments in Asia tend to carry a larger weight these days,” says Kenneth Broux, a strategist at Societe Generale.

The Fed’s slow but steady steps toward a normalisation of its monetary policies are supportive of the greenback and come at a time when the Euro is lacking a fundamental catalyst for its own recovery even as the Eurozone economy tentatively outperforms its U.S. counterpart.

This is after the European Central Bank (ECB) updated its monetary policy strategy in July, replacing its earlier inflation target with a new and slightly higher objective that has been seen as likely to necessitate a much larger dose of monetary stimulus and lengthier period of support in order to be met.

“The ECB pledged not to raise interest rates until inflation is seen as stabilising durably at the 2% inflation target well ahead of the end of the projection horizon, i.e., converging to 2% at the end of their forecast horizon is no longer enough. The contrast with the outlook for FOMC policy is a weight on EUR/USD,” says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.