Friday’s Price Action Cannot Be Ignored
It led to a bearish engulfing candle on the daily dollar index (DX) chart and a morning star reversal pattern on a daily chart for EUR/USD.
The candle on DX for Friday nearly fully wiped out four days of gains. There is a bit of divergence in the inverse correlation between it and EUR/USD. Specifically, EUR/USD only erased about half of the early week losses on Friday’s recovery.
As such, the DX daily chart paints a much stronger case for continued dollar weakness. However, DX is near support at a horizontal level that held it lower in early May and higher in the late month.
I don’t think a catalyst is in place for an early week break down which is why I expect the dollar can bounce a bit in the session ahead.
The above 4-Hour chart shows a confluence of resistance overhead. It comes from the 100 moving average and the upper bound of a declining trend channel.
The 200-period moving average is slightly above the 100 to offer additional resistance. Currently, it resides at 1.1193.
Going into the North American session, the 4-hour candle close will be important. A close near session lows would result in an evening star pattern which would encourage New York traders to try a short position.
On an hourly chart, EUR/USD has been holding above the 200-period moving average. Since bouncing from it, the pair has climbed back above a horizontal level at 1.1170.
Overhead resistance at 1.1183 looks quite strong to me, considering the prior failure and the presence of the trend channel mentioned above.
The 100-period moving average seems to be converging to a horizontal level at 1.1150. I think this area offers strong support in the event of a decline.
- Although EUR/USD shows upward momentum, I expect it can pull back from here considering the resistance in play. A test of support at 1.1150 seems possible.
- There will likely be a lot of stops above 1.12. I think if we move above it, there could be a jump in volatility as bears look to cover.
- Considering the signals provided by the EUR/USD and DX daily charts, I think EUR/USD can move higher later in the week. I may consider a long position from support at 1.1150/1.1144 if we get there.