Key Points:
- A near-term reversal is now likely given the technical bias.
- Any potential rally is likely to be limited to the 1.12 handle.
- Monitor the EU data as the week closes
The euro has been declining fairly consistently over the past few weeks but the bears may have finally met their match in the 1.1123 support level. As a result, a reversal may finally be back on the cards and this could potentially see the EUR/USD make a beeline for the 1.12 handle in the days ahead.
Nevertheless, before we take a look at where the euro could rally to, it’s prescient to look at exactly why a reversal is expected in the first place. First and foremost, it is the apparent robustness of the current level of support around the 1.1123 handle that gives us our initial clue that upsides are on the way. Indeed, looking back historically, this price has proven to be a reversal point on multiple occasions – most notably in the latter stages of last year. More recently, this level has shown a similar degree of rigidity and refused to give in to selling pressure.
However, a strong support level doesn't necessarily translate into a near-term uptrend every time which could mean that we will simply see losses stall going forward. Luckily for us, numerous other technical readings are intimating that a sizable rally is actually warranted. For one thing, the EMA bias is, quite patently, highly bullish even in the wake of a fortnight of losses. Furthermore, stochastics are overbought which means some buying pressure is likely to be seen shortly.
One final bit of technical analysis to consider is the current Bollinger band reading, depicted on the above chart. Currently, price action rests not only on the 38.2% Fibonacci level but also right on top of the lower band. Ordinarily, this signals that the pair is primed to move back towards the basis line which is, in this case, around the 1.12 handle.
Overall, the technicals paint a rather bullish picture which should mean that a recovery is going to occur shortly. However, this recovery is unlikely to erode all of the recently incurred losses and should be limited to around the 1.12 handle. This is due, in part, to the basis line of the Bollinger bands but also to the parabolic SAR which has yet to shake its bearish bias. It is also worth noting that a bit of a deluge of EU-specific data is due out as the week closes which could kick start a recovery or delay it depending on the results.