EUR/USD Morning Star, ECB on Deck

Euro, EUR/USD talking points:

  • Last week, the euro saw a crash against the USD, reaching a new annual low.
  • After a doji on Friday, Monday saw a strong bullish move to create a morning star reversal formation. So far, that strength has continued on Tuesday, with the main focus on European inflation to be released tomorrow and the European Central Bank on Thursday.
  • The analysis in the article is based on: price action and card formations. For more information on price action or chart patterns, check out our Referus Education section.

Well it finally happened EUR/USD pushed below the large support zone at 1187-1212 to set a new 18-month low. The drive came from last week’s FOMC rate decision and as interest rate markets rallied in the wake of that event, USD strength pushed a number of major pairs to new lows.

Given the divergence between US and European interest rate policies, which appears to continue to grow, sellers have remained in control. The big question right now seems to depend on how hawkish the FOMC will remain this year and how many rate hikes they will actually make. But this isn’t a new theme, as this is the same the pair had for the second half of last year, all the way up to Thanksgiving, after which that key support zone came into play.

In December, the EUR/USD bounced, even as sellers remained active, and the pair continued to offer resistance at 1.1374. That back and forth even led to trading in 2022 and along the way the pair built a ascending triangle formationoften approached for the purpose of bullish breakouts.

And even with that fundamental divergence clearly favoring USD trends given interest rate expectations, the EUR/USD formed a bullish breakout midway through last month, fresh on the heels of a 7% CPI print out of the US.. I had marked the setup for the move, targeting resistance in the 1448-1500 zone that may still be relevant to the pairshort-term.

EUR/USD Daily Price Chart

EURUSD Daily Price Chart

Chart prepared by James Stanley; EURUSD on Tradingview

EUR/USD Sellers Returns

Then the resistance came into play at 1448-1500, sellers slowly started to find their way back in. Last week started with EUR/USD price action with trendline support of the previous ascending trianglebut that started to give way just before the FOMC rate decision on Wednesday.

But it was the FOMC rate decision and its immediate aftermath that really brought the bears out, leading to that break of support as the pair pushed to new 18-month lows.

EUR/USD reversal shades starting to show

Last Friday saw a doji print on both USD and EUR/USD daily charts, and given the extreme trend that had shown itself beforehand, it made sense.

But yesterday’s price action is what makes this more interesting and maybe even more doable – as showed reversals in each built into a morning star formation in EUR/USD and an evening star pattern in USD.

Such formations are often followed for reversals, while the morning star reversal traders are often looking for strength to follow with the potential for that formation to have marked the low.

The fundamental drive here seems to come from the fairly new expectation that US data is starting to disappoint, with even some expectations of a negative NFP print this Friday.

With an extremely heavy economic calendar this week, that could keep the door open for top-side scenarios in EUR/USD, looking for prices to retest past resistance levels. As I shared on Twitter yesterday, the 1272 spot was the first level of interest after prices bounced back above the 1187-1212 zone.

This could also hold the door open for a near-term bullish continuation, provided higher-low support is shown after this new short-term higher-high.

From the two hour chart below, we can see that the resistance is playing from that 1272 level, and the 1187-1212 spot is now becoming an area of ​​interest for a higher-low support potential.

EUR/USD two hour price chart

EURUSD two hour price chart

Chart prepared by James Stanley; EURUSD on Tradingview

— Written by James Stanley, Senior Strategist for Referus

Get in touch and follow James on Twitter: @JStanleyFX