EURUSD: correction after Thursday’s selloff

The last two trading days of last week were wild! This is especially true for the EURUSD pair, which was first rocked by the ECB and then, for dessert, by the ultra-low NFP reading on Friday. The first event was much more important and left a big scar on the chart; one that was definitely anticipated by technical analysts.

First, let’s explain what happened here from a fundamental point of view. A global economic slowdown is imminent and banks are bracing for it by taking a more dovish approach. Instead of thinking about increasing rates, the ECB took the opposite approach by launching another massive easing operation. This is never good for the currency, so it came as no surprise that the EURUSD rate dropped. To be honest with you, I was expecting more here. The body of Thursday’s candlestick is around 120 pips, which is nothing. We could have easily made that without help from the fundamentals. The reason for this may be the huge oversold conditions on the EURUSD pair as well as the fact that we reached the lowest levels since June 2017.

EURUSD D1

From a technical point of view, this movement was more than expected, at least for price action followers. EURUSD was in a descending triangle pattern, which was promoting a breakout to the downside, especially after the most recent bounce from the upper line of this pattern, which created a head and shoulders pattern on the H4 chart (orange).

The new week starts with a continuation of Friday’s reversal. The bounce is aiming at the lower line of the triangle, but this time from the bottom. In theory, we should be able to use this as a good resistance but we can see that demand has not subsided and the pullback is gaining traction. If we close the day above the blue line, it will mean a false breakout and could be a good occasion to go long.

This week we’ll get retail sales and Inflation data from the US. Those two figures should have the highest impact on the main pair this week. The question is whether this data will be as weak as the NFP report from Friday or whether that was just a one-off.

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