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EUR/USD: is the bullish trend flagging?

The EUR/USD has recovered strongly after last night’s sell-off, but the pressure remains as its tests key technical levels. The ECB dropped a bombshell late in the session yesterday, announcing that it will no longer accept Greek debt as collateral for the loans it makes to the country’s banks. The news sparked fresh concerns across the European equity markets this morning, with Greek banks taking the brunt of the sell-off. But both the euro and stocks managed to recover their poise as the morning session wore on. This was in part due to profit-taking on news factory orders in Germany had surged by 4.2% in December, which was significantly more than expected. Nevertheless, the pressure remains and another move lower from here would not come as a surprise to us. The focus now shifts over to the US where we have some important data to look forward to over the next couple of days, culminating in the release of the monthly jobs report tomorrow afternoon.

Although the EUR/USD has broken above a downward-sloping trend line, the bulls have so far lacked the conviction to increase their positions significantly. This is not a major surprise given the on-going Greek concerns and also the recent announcement by ECB that it will start a bond buying programme. It is interesting to note that the EUR/USD has also found some resistance around the key 1.1460 area, which was previously support and also corresponds with the 61.8% Fibonacci retracement level of the last downswing. But following last night’s sell-off, the EUR/USD has bounced back strongly from the 1.1300/05 support. This level is the base of the apparent bear flag pattern that is being displayed on the 4-hour chart. As the name suggests this technical pattern is found in downward trending markets and when price breaks below the support trend of the flag, a continuation of the trend usually commences.

If this actually is a bear flag then we could see the resumption of the downward trend soon with the first major target being the prior lows around 1.1100. However, the risks for a short-squeeze rally still remains high, which may commence upon a decisive daily close above 1.1460. In this scenario, the EUR/USD could squeeze towards the 1.1650 resistance before deciding on its next move.

Figure 1:

Source: FOREX.com


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