Head-and-Shoulders

Around 1am London, EUR/USD spiked higher and, upon closer inspection saw the bid for Euro was broadly based. This leaves a potential bullish breakout on the cards for UK or US trading session ahead of the weekend.

Last week, we highlighted the bearish head-and-shoulders pattern forming on the US Dollar Index (see “Dollar Index Head-and-Shoulders Pattern in Play After Weak Inflation Data” for more). With the euro making up nearly 60% of the dollar index, it’s not surprising that a similar, inverted head-and-shoulders pattern is forming on EUR/USD, as we’ll see below. That said, the longer-term context of the EUR/USD setup makes it particularly interesting.

EUR/GBP continued its sharp slide on Wednesday morning for the second consecutive day this week as the euro has generally remained in a prolonged slump and sterling has once again taken center stage as the star performer against other major currencies. In the process of this slide, the currency pair hit a new 16-week low under 0.7600 early on Wednesday.

Wednesday’s hawkish FOMC minutes increased speculation that a June interest rate hike by the Federal Reserve may be more likely than previously anticipated. These higher expectations have helped prompt a boost for the US dollar, a plunge in gold prices, and pressure on US and global stock markets. Additionally, a pullback in crude oil prices on a stronger dollar and abating oil supply disruptions has led to a drop in the energy sector, which has also weighed on equities.