Most currency pairs are consolidating in quiet trade today as traders are loath to put their capital at risk ahead of the tomorrow’s NFP report and a long holiday weekend (stay tuned for our full NFP preview report later this afternoon). At times like these, it pays to remember that the sideways market movements set the stage for more significant trends, and that traders who use these quiet periods to prepare for the inevitable breakouts are the ones who are most successful. On that note, EURCHF’s price action is particularly interesting. The pair has been consolidating between 1.04 and 1.05 for the last week, but one way or another, we’re likely to see a major breakout tomorrow or early next week.
There are at least 3 reasons why the 1.0400 level is crucial for EURCHF:
1) Bottom of the Falling Wedge – Over the last three weeks, EURCHF has formed a clear falling wedge pattern on the way down to 1.0400. This classic technical analysis pattern is created by a series of lower lows and lower highs in the exchange rate, but it is actually seen as a potentially bullish sign. Because the highs are declining more rapidly than the lows, it shows that sellers are losing momentum on each subsequent thrust lower; if the unit manages to break above the upper trend line near 1.0425, it would shift the bias back to the topside. Of course, a drop through the bottom of the pattern at 1.0400 would counteract any of these bullish implications.
2) Corresponding RSI Triangle – The 4-hour RSI indicator is forming its own triangle-type pattern over the last few weeks, and with the two trend lines converging, an RSI breakout is inevitable in the next couple of days. Once it breaks, the momentum indicator could form a new trend with obvious implications for price.
3) Key Fibonacci Retracement – The 1.0400 level also marks the 38.2% Fibonacci retracement of EURCHF’s entire rally off the post-SNB lows. With the pair forming a bit of a rounded top over the last two months (not shown), a break below this key level could prompt the bullish traders who capitalized on the SNB’s panic lows to book their profits.
If EURCHF drops through support at 1.0400, a continuation down toward the 50% Fibonacci retracement at 1.0260 is possible by mid-April, whereas a bullish breakout could lead to a more substantial rally back toward 1.0500-1.0600 later this month. Either way, the price action around the 1.0400 level over the next couple of days will be critical for EURCHF traders.