EURUSD – Preparing For Potential Volatility AheadThe week ahead has all the elements to be a volatile one for EURUSD traders to navigate. First, the unwind of long positions that has been on-going throughout July, since prices hit a 4 year high at 1.1830 on July 1st may have potentially found a short-term base after rebounding last week from printing a low of 1.1556 on Thursday. More on this in the technical section below.
Secondly, Bloomberg reported over the weekend that negotiations to agree a trade deal between the US and EU are proving to be more challenging than initially hoped. This leaves room for market moving headlines on this topic, or social media posts from President Trump that could influence the direction of FX markets, especially if it shifts trader expectations towards preparing for the prospect of a trade war between these two global economic heavyweights.
Then on Thursday, consideration needs to be given to the ECB interest rate decision (1315 BST) and then the press conference led by ECB President Lagarde, which starts at 1345 BST. After eight consecutive rate cuts at their previous meetings, the European Central Bank are expected to take a pause to assess incoming inflation and growth data, so this outcome would probably not be a surprise. However, the comments of Madame Lagarde in the press conference could increase EURUSD volatility given that there is some uncertainty surrounding whether a further rate cut is possible either in September, or later in the year.
Technical Update: Limited Price Correction or Reversal?
We all know well, even if an asset is trading within a positive uptrend, periods of price weakness can materialise, before fresh buying support develops. This can lead to renewed price strength that manages to break and close above a previous high, leading to an extension of a pattern of higher price highs and higher price lows.
Having been capped by the July 1st high at 1.1830, EURUSD has seen a price correction develop. Traders may be trying to decide if this is a limited move lower before fresh price strength is seen, or if it could be a price reversal, which may result in risks of a more extended phase of price weakness.
Much will depend on the outcome of the risk events outlined above, as well as future market sentiment and price trends, however it is possible to assess what may be the important support and resistance levels that traders could focus on to help gauge the next direction of price activity
Potential Support Levels:
After a period of price strength, it can be useful to calculate Fibonacci retracements on the latest up move to identify areas of potential support. As the chart below shows, for EURUSD, the latest phase of price strength seen from 1.1065 the May 12th low up to 1.1830, the July 1st high can be used for this purpose.
The 38% retracement of this advance stands at 1.1539 and after having remained intact during last week’s sell off, traders may now be watching how this support level performs on a closing basis.
Breaks below 1.1539, while not a guarantee of further price declines, may then lead to a deeper phase of weakness towards 1.1446, the June 19th low, even 1.1356, which is equal to the lower 61.8% retracement level.
Potential Resistance Levels:
If the 38% retracement support at 1.1539 holds any future price weakness in the week ahead, a positive trending condition may still be in place, opening the possibility of EURUSD moving back to higher levels again.
Any potential upside move could bring 1.1690 into play as an important resistance. This is the current level of the Bollinger mid-average, with closing breaks above this needed to open retests of 1.1830 July 1st highs, maybe further if this is in turn broken.
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