Yesterday, we discussed the formation of a "head and shoulders" pattern, and it is now evident that this pattern has indeed emerged, suggesting a potential continuation of the euro's downward movement. We previously mentioned that the euro had been undergoing a correction following the previous month's decline in recent weeks. The correction has concluded at this point, and the price may resume moving toward the 6th and 5th levels. We have been anticipating a significant decline in the euro for some time.
The EUR/USD pair remains relatively high, particularly in the 24-hour timeframe. Assuming that the euro has been rising over the past ten months due to the ECB's monetary policy, this influence should have ceased by now. In the case of the Federal Reserve, the market had already factored in most rate hikes in advance. When inflation started to decline in the US, the market sold the dollar instead of buying it, despite the ongoing rate increases by the Fed. Currently, the Fed's rate remains higher than the ECB's rate, with two additional rate hikes expected. However, the euro is holding its position over the long term.
In 2023, the market kept the euro high due to heightened expectations for the ECB's rate. However, this factor cannot persist indefinitely. Although the dollar lacks clear reasons for substantial growth, it has experienced a significant 1560-point decline over the past ten months, necessitating a substantial downward correction. On the daily timeframe, we observe consolidation throughout the year. The price has remained within the range of 1.05 and 1.11 for the past six months, and now a "head and shoulders" pattern is also forming on the daily timeframe. Overall, the euro should decline at least to the 1.0500 level.
The ECB's hawkish sentiment is insufficient to drive the euro's rise.
Christine Lagarde and several colleagues spoke at the annual economic forum in Sintra on Tuesday. However, we have been waiting for any new information from the ECB for quite some time. The European regulator follows its plan of gradually tightening monetary policy by 0.25% at each meeting. Even before the June meeting, the market was confident that the rate would increase by 0.25% at the next two meetings. It is still being determined what will happen in the autumn, as some members of the ECB's monetary committee express doubts about the advisability of further tightening while others do not. In any case, we must wait until autumn for further developments.
The global trend now heavily relies on the rates of the ECB and the Federal Reserve, or more accurately, on the market's perception of these rates. It often happens that anticipated movements are delayed, as illustrated by the daily timeframe, which has shown a limited price range for the past six months. Consequently, our forecast is consistently pushed back, but it remains unchanged. We still see no reason for the euro to continue rising after gaining 1560 points.
Returning to Christine Lagarde's speech, her rhetoric remains hawkish, but the euro no longer exhibits the same enthusiasm. Similarly, the rhetoric of Jerome Powell and Federal Reserve representatives remains hawkish. Thus, the euro and the dollar are currently in comparable conditions (excluding economic indicators), with the euro being overbought while the dollar is oversold.
As of June 29th, the average volatility of the EUR/USD currency pair over the past five trading days stood at 70 points, categorized as "average." Therefore, we anticipate the pair to fluctuate between the levels of 1.0823 and 1.0963 on Thursday. A reversal of the Heiken Ashi indicator, indicating an upward movement, would suggest a possible resumption of the upward trend.
Nearest support levels:
S1 - 1.0864
S2 - 1.0803
S3 - 1.0742
Nearest resistance levels:
R1 - 1.0925
R2 - 1.0986
R3 - 1.1047
Trading recommendations:
The EUR/USD pair has reestablished itself below the moving average as the "head and shoulders" pattern has formed. It is advisable to remain in short positions with targets at 1.0864 and 1.0823 until the Heiken Ashi indicator reverses upwards. Long positions will become relevant again only after the price consolidates above the moving average line, with targets at 1.0963 and 1.0986.
Explanations for the illustrations:
Linear regression channels - help determine the current trend. If both channels are directed in the same direction, it indicates a strong trend.
Moving average line (settings 20.0, smoothed) - determines the short-term trend and the direction for trading.
Murray levels - target levels for movements and corrections.
Volatility levels (red lines) - the probable price channel the pair is expected to trade in the next day, based on current volatility indicators.
CCI indicator - its entry into the oversold region (below -250) or overbought region (above +250) indicates an approaching trend reversal in the opposite direction.