Euro Price Outlook: EUR/USD Runs from Resistance Ahead of ECB, PCE

Euro, EUR/USD, ECB Talking Points:

• Tomorrow brings the European Central Bank rate decision, followed by the Friday release of PCE out of the US. And then next week brings FOMC on Wednesday and NFP on Friday, making for a busy week-and-a-half ahead.
• EUR/USD remains in a bear flag formation and just received a hard reaction from bears after testing resistance at 1.0673. There is still higher-low support in-place, and this keeps the door open for pullback potential in the pair.
• I’ll be discussing these themes in-depth in the weekly webinar on Tuesday at 1PM ET. It’s free for all to register: Click here to register.

The bullish breakout in EUR/USD was met with harsh response from bears. The pair set a fresh monthly high on Monday and then on Tuesday, saw almost the entirety of the move priced-out. I talked about this in yesterday’s webinar and there remains some inter-play with the US Dollar, which is testing resistance atop a falling wedge formation, as of this writing.

While the continued failure to break through resistance may seem disconcerting for bulls, it does keep the pace of how the pair has been performing since the 1.0500 support zone came into play in late-September. Each bounce from that support zone has pushed up for the test of a higher-high which was then met with a strong response from sellers. But, throughout the process price has held within a bullish channel and that remains the case at the time of this writing.

The first 1.0500 test led to a bounce up to 1.0611, which is a key Fibonacci level taken from the 2021-2022 major move in the pair. That resistance inflection led to a push below the 1.0500 level, briefly, but when sellers failed to continue the break the corresponding bounce ran to the top of that resistance zone at 1.0636. This was, again, met with a strong response from sellers – but this time, bears couldn’t get back-below 1.0500, and the move stalled whilst making a higher-low, and that led to the next extension in the bullish move.

The next item on the radar was 1.0673, a level that I’ve been talking about since the 1.0500 price came into the picture. That price traded on Monday and into Tuesday, but around the European open sellers slammed it back down and, at this point, price has again held around a higher-low, thereby keeping the bullish trend channel alive along with the potential for continuation of the topside move.

There’s but one possible problem, and that’s the European Central Bank rate decision sitting on the calendar for tomorrow, which is followed by a slew of relevant data points that can unsettle the current backdrop.

EUR/USD Four-Hour Price Chart

Taking a step back to the daily chart offers a better view of that bear flag formation.

The sell-off that took over in July was incredibly consistent and bears didn’t allow for much pullback along the way. It did, however, lead to the first oversold RSI reading on the daily chart of EUR/USD since before the pair had bottomed last year, and since then bears have had difficulty when testing support. That’s led to the higher-highs and higher-lows that have shown in the form of a bullish channel.

That bullish channel, relative to the prior sell-off, makes for a bear flag formation. Price is currently testing support at the higher-low which plots very near the 14.4% retracement of that bearish move. The 38.2% Fibonacci retracement of that move aligns with a significant spot of support-turned-resistance at 1.0765 and this makes for another spot of overhead resistance if bulls can evoke a topside breakout.

A 38.2% retracement of the initial bearish move may be enough to entice sellers again and given the slate of data sitting ahead, it’s quite possible for such a move to play out. The ECB rate decision tomorrow is followed by the release of the Fed’s preferred inflation gauge in the form of Core PCE on Friday; and that leads into both FOMC and Non-farm Payrolls next week. So, the stage is set for high-volatility across USD-pairs, EUR/USD especially.

The big question as we go into that slate is whether EUR/USD bears are given enough to motivate them back into the trend, or whether a relief rally sees shorts get squeezed.

EUR/USD Daily Price Chart

--- written by James Stanley, Senior Strategist