EURUSD long-term technical outlook

ECB President Mario Draghi spoke today and reiterated the Bank’s pledge to keep policy rates at their present or lower levels for an extended period of time. He indicated that the economy is still weak and that the euro area faces considerable challenges such as continued fragmentation. Draghi noted that the ECB injected a downward bias in interest rates and, in our view, this suggests a downward bias on the currency. The euro has stabilized today amid a meeting by EU finance ministers and despite weaker German industrial production in May, however the long-term technical picture looks quite bearish.

The weekly EURUSD chart shows that the pair is consolidating within what appears to be a head and shoulders pattern (H&S). The pair recently rebounded from the H&S neckline but the rise may find resistance in the near term around the 50% retracement of the rally from 2012 lows to 2013 highs. A move above the 50% retracement may see a continued rise towards the convergence of the 38.2% Fibonacci retracement and 100-week simple moving average (SMA) around the 1.3075/90 zone as the next level of resistance before a possible retest of a downward trend line which began at the 2011 highs.

A break below the H&S neckline may find initial support around the 61.8% Fibonacci retracement and lows of November around 1.2660/80. The head and shoulders objective is determined by projecting the distance from the top of the head to the neckline from a break of the neckline (which has yet to occur), but a break in the coming weeks would indicate an objective around the 2010 lows around the 1.19 area.

Support

1.2800 – potential H&S neckline
1.2660/80 – 61.8% Fibonacci retracement & Nov. lows
1.2435 – 76.4% Fibonacci retracement
1.1875/80 – 2010 lows

Resistance

1.2875/80 – 50% retracement
1.3075/90 – 100-week SMA & 38.2% Fibonacci retracement

Source: Forex.com

08.07.2013