In FX, the dollar has traded mixed so far in today’s session, rising noticeably against the yen but falling against the euro and commodity dollars. The pound remained weak amid Brexit uncertainty, with the downbeat currency certainly not helped by headlines that the UK is planning to quit trade talks if no deal is seen by October 15. Despite this, there was an
apparent sense of calm in the equity markets after Tuesday’s sharp spike in volatility, when Donald Trump decided to end stimulus talks until after the election. There was no downside follow through following Tuesday’s drop in risk assets as European stock markets rebounded and US index futures made back a big chunk of their losses from the day before. But now that we are heading into the US session, will we see the return of volatility? If so, will this cause the EUR/USD to drop again?
Resilient euro despite ECB warnings
The euro has been fairly resilient thus far in today’s session despite raised Brexit uncertainty and continued warnings from the ECB regarding the recovery while concerns have also been raised about the exchange rate. ECB’s President Christine Lagarde earlier said that the central bank needs to maintain ample stimulus to reach its goals and should guard against premature withdrawal of stimulus. She noted that the ECB sees risk of more divergence in the euro area after crisis and that ambitious and coordinated fiscal stance is critical to economic recovery. This comes after Lagarde said the recovery remains “shaky,” the day before which raised speculation that more stimulus may be on the way in December.
Mixed Eurozone data shrugged off
Yet despite this, the EUR/USD hasn’t sold off yet, as traders continue to test the ECB by bidding up the exchange rate. Meanwhile there was little reaction to today’s mixed macro data from the Eurozone this morning, as German Industrial Production unexpectedly fell by 0.2% m/m when a rise of 1.5% was expected, while Italian Retail Sales jumped 8.2% m/m compared to a more modest rise expected.
EUR/USD coils inside bear flag
From a technical point of view, the EUR/USD remains inside a consolidation pattern, and is thus not trending in a particular direction at the moment. However, while the exchange rate hasn’t been going anywhere fast over the past couple of months or so, we have observed a couple of potentially bearish signs on various times frames, suggesting some weakness may be on the cards soon.
The exchange rate hit the key 1.20 psychological hurdle on the first day of September, and since then we have seen it drift lower, making interim lower lows and lower highs. This hasn’t materially damaged the long-term bullish trend, although now there is a risk we could see a short-term drop as the EUR/USD consolidates inside THIS bear flag pattern on the daily:
Source: ThnkMarkets and TradingView.com
For the above bear flag pattern to become validated, we do need to see rates break below the support trend of the flag, which comes in around 1.1720 area. Otherwise, the bears could get into trouble – which wouldn’t be too much of a surprise to be honest, especially as so much time has elapsed inside this consolidation range and the bears have not been able to push rates down. So, if the sellers are to come in, this is the right time, given the above fundamental developments.
Possible inside bar failure on weekly?
Meanwhile, the weekly chart shows a possible inside bar failure pattern. Last week, the EUR/USD recovered some of the losses from the week before, resulting in the formation of an inside par pattern. This week, rates have tried to break above the inside bar high, thus taking out some of the buy stop orders that were presumably resting there from previous sellers, and encouraging breakout buyers to step in above last week’s range. However, if all these buy orders are used to fill sell orders and there is no upside follow-through, then it will likely result in a failure, resulting in a sharp move in the opposite direction.
Source: ThnkMarkets and TradingView.com
So that is the bearish scenario I am trying to map out in this article for EUR/USD traders. Thus, it may be worth watching price action on the lower time frames closely today. Any hints of a bull trap around 1.1770-1.1800 area and a move back below last week’s high could result in a sharp move lower. However, that bear trap must be observed first before one decides to turn decisively bearish on the exchange rate in the short-term.