Technical Analysis: EUR/USD at Crossroads with Divergent Views Between Strategists - PSL Bullish

Despite a meteoric rise in the first half of 2017, some analysts are turning bearish EUR/USD although Pound Sterling Live retains a bullish outlook. 

The Euro-to-Dollar exchange rate has risen strongly in 2017, going from lows of 1.0342 in February to a high of 1.2094 in September. 

Its advance has since stalled, close to the 50-month moving average (MA) at 1.1742, and the pair is now oscillating within a range between 1.16 and 1.20.

Large moving averages such as the 50-month MA often act as obstacles on charts, so an asset price that is rallying may be likely to come to an abrupt halt after touching the MA.

This is often because more sellers enter the market at the level of the MA in anticipation that the price may go down and as they enter with sell orders, sure enough, the price goes down.

The look and feel of the monthly chart also supports an extension higher once the sideways move ends, mainly because of the very strong and steep rally in the first half of 2017. This is unlikely to precede a complete reversal. 

The weekly chart, below, seems to provide further indications of bullish potential. It shows how the pair corrected back in a classic three-wave a-b-c correction to 1.1620 between July and October, before rising back up to a peak of 1.1962.

This week we expect the pair to recover again. Technical theory holds that if you get a two-down-period correction in the midst of an uptrend, there is a 66% chance the next period will not be down. This means it is unlikely EUR/USD will close the end of the week below its weekly open of 1.1766.

Zooming into the daily chart we see yet further indications of more upside in the short-term. This is because the pair has pulled back in a classic three-wave a-b-c correction again, which now appears complete, thus supporting the possibility of a recovery. 

The pair has also fallen back down to a cluster of two strong support levels that are likely to help prevent further downside. These include the 50% retracement level, or halfway point, of the previous move up from the start of November (blue line) and the 50-day MA.

Both these levels may attract traders who seek to buy the pair in anticipation of a bounce, increasing the possibility of a push higher, so we expect the pair to recover back up to the 1.1958 highs. 

A move above 1.1850 would probably confirm a rise up to the 1.1958 highs. A break above 1.1960 would confirm a fresh bullish move up to a target at 1.2060, which is just below the R1 monthly pivot. R1 is likely to cap further upside, however, at least temporarily.

Many technical traders expect a pull-back at monthly pivots, and trade the possibility as a short-term bearish bet. This increases selling at the R1, leading to lower prices and, essentially, making the downside bet a 'self-fulfilling prophecy'. 

Institutional Views

In contrast to Pound Sterling Live's bullish outlook, Karen Jones, a technical analyst at Commerzbank, is decidedly bearish EUR/USD. 

"EUR/USD stays negative. Yesterday we saw a small bounce higher – this is expected to remain short-lived, and failed circa 1.1810 as expected. The 55-day ma has been eroded BUT we have seen NO close below here (1.1760)," she says.

The signal for a deeper sell-off would come from a close below 1.1712, which would, "be enough to negate upside pressure and allow for slippage back to the 1.1553 7th November low."

Richard Perry, an analyst at Hantec Markets, also highlights 1.1712 as a possible short term target for the pair. 

"The negative candles continue to rack up as the drift lower on EUR/USD continues. With a four-week uptrend having been broken this week there is a new formation of a downtrend developing. This comes with the decisive breach of the previous support at $1.1807 and a move now seemingly towards the next reaction low at $1.1712," the strategist says.

"The momentum indicators are decisively corrective now with the MACD lines posting a bear cross, the RSI falling below 50 and the Stochastics tracking ever lower. This suggests that on a technical basis, rallies should be sold into now."

Taken together, these two recommendations are very bearish. More neutral however, is Robin Wilkin, a strategist at Lloyds Banking Group, who views the pair as "trapped in a range" between 1.1750/10 and 1.1815, with momentum indicators back in "a neutral zone, which offers little guidance at this stage."

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