EUR/USD on the ropes as US dollar bears back peddle

Last week I mused as to whether the dollar’s next directional move could be down to a trendline. I don’t like to plan my trades around trendlines, as it seemed overly simple. Although social media was bursting with bearish calls for the dollar after it had been falling for two weeks already.

Less than a week later, the US dollar index has respected the December trendline perfectly and risen ~0.9% from Thursday’s low. Interestingly, the decline from the May high come in at -2.2% and in three waves, which is not too dissimilar from February’s three-wave decline of -2.4%. Wednesday’s low coincided with the RSI (2) being its lowest level since March, days before it rallied from the said trendline. For now at least, history seems to be repeating.

The jury remains out as to whether we’ve seen a significant low or this is merely a ‘sympathy bounce’ ahead of another dip lower to break the 2024 trendline. But with the Fed pushing back on rate cuts yet again, there could be some further upside for USD at least over the near term.

The next resistance cluster for the US dollar index sits around 105 (round number) and 105.20 (high-volume node), which hovers less than a day’s trade away. The bias remains for a test of this zone before a pullback and eventual break above it. For now, I doubt the dollar will break above 106 unless US data picks up and spooks traders with talks of further Fed hikes. But a move to 105.50 or 105.80 seems feasible.

Flash PMIs in focus for Europe, UK, US:

We should see some pockets of volatility in the European and US sessions thanks to the flash PMI reports, which provide a forward look at growth and inflation. Consensus estimates have pencilled in higher numbers for Europe and lower for the US. If these numbers are met (or ideally exceeded) then it could prompt a retracement lower on the US dollar index, in support of EUR/USD.

Yet the more volatile moves tend to occur when expectations are not met. Should European data disappoint and US PMIs bear the consensus, I suspect the US dollar index could break above 105 / 105.20 to the detriment to EUR/USD, which looks more likely to test 1.08 in the foreseeable future than not to my eyes.

EUR/USD technical analysis:

The decline from the 1.0895 high has accelerated over the past day, although support was found perfectly at a high-volume node yesterday. This has allowed prices to drift higher on low volumes, yet resistance hovers nearby and a bearish divergence is forming on the RSI (2) on the 30-minute chart. The RSI (14) is also around the neutral level, but it should dip lower should prices fall in line with my near-term bearish bias.

With the daily pivot point near the 50-dar EMA, bears could seek to fade into moves around 1.0830/35 with a stop above the monthly pivot at 1.0843. If prices move higher initially, the bias remains bearish whilst prices hold beneath the 1.0847 high / 100-hour EMA, and bears could fade into moves towards the weekly pivot point. The HVN, daily S1 or 1.08 handle make viable target for bears over the near term.

However, given the 4-hour RSI (2) has twice reached oversold and formed a small bullish divergence, I’m also on guard for a larger bounce before US dollar strength forces EUR/USD below 1.08.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge