Since the end of August last year, the EURUSD has been under pressure. In this regard, it has charted a lower peak followed by a lower trough. November marks the last significant low (aqua ellipse). Since then, the EURUSD has been resilient and has ground its way higher. However, it now approaches the 50% retracement of its last leg down. Moreover, price action resembles a classical charting pattern of a flag (parallel black dashed lines), which is categorised as a continuation pattern. I.e., if this is a flag, then once it completes, the EURUSD is expected to move in the direction of the prior impulse, which is to the downside.
Today's headline inflation print came in over 7% on an annual basis, which is the fastest increase since the early 1980s. The core CPI, which strips out volatile items, was 5.5%, which is the biggest gain since the early 1990s. The Fed minutes released a week ago show that the central bank is concerned over current price levels. In this regard, the policy has shifted hawkish with three rate hikes communicated, an end to its bond-buying program by March, and a normalisation of its balance sheet. Therefore, the support for the EURUSD is puzzling. However, the market has been concerned over inflation for some time, questioning the Fed's previous stance that inflation was transitory. In this regard, the USD accelerated in trend as far back as September, pricing in more sustained inflation and a more aggressive Fed. I.e., markets are forward-looking.
If current prices are indeed a flag, it is effectively the market "buying the rumour, and selling the fact" (where the US dollar is concerned). Therefore, the 50% retracement may prove significant and if the flag completes, the next prospective leg down for the EURUSD is expected. In other words, this current EURUSD support is suspicious and may become a target for shorts soon. As such, we continue to monitor.
Past Performance: Past Performance is not an indicator of future results.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.