Bearish Potential in EUR/USD Seen Growing

The EUR/USD exchange rate has been consolidating over the last few days after the sharp move lower from the March highs.

Our studies suggest from here the overall bias is for more downside once the sideways mode has finished. 

"Rebounds from here are likely to be pretty tepid,” notes Commerzbank’s Karen Jones, “and we look for losses to the base of the short-term channel at 1.0587.”

The pair formed a ‘three black crows’ Japanese candlestick pattern on its way down, which consists of three relatively long down days in a row, and is a particularly bearish indicator.

Research shows that this and the structure of the market give a 66% probability that the exchange rate will fall at least a further 300 points lower.

The pair is currently moving sideways at the level of the 50-day moving average (MA) which is a tough support level to break beneath.

For confirmation of more downside we would like to see a move below the 1.0634 lows, which would then be expected to reach a downside target of 1.0400.

“Short positions are still favoured but conviction would be far greater on a breach of $1.0640 that would open the lows at $1.0600 and $1.0492. A close above $1.0710 would improve the outlook,” commented market analysts Richard Perry of online FX broker Hantec.  

A bearish ‘Flag’ pattern may also be forming, which looks like an upside down flag, with the pole consisting of the steep ‘black crows’ move down from the March highs and the flag the most recent sideways phase.

A break to the downside is forecast by the pattern with a final target at the point where the move down is roughly equal to the pole extrapolated down.

Today is likely to be a down-day – i.e. a close below 1.0678 - as the two small up-days on Monday and Tuesday in the midst of a strong sell-off increase the probabilities of Wednesday leading a resumption lower.

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