The past few days have proved relatively positive for the euro as the currency has largely benefited from the negative USD sentiment. However, the storm clouds are now gathering over the European banking sector whilst technical analysis points to a pending short play.
To date, February has been largely bullish for the euro as the pair was buoyed by mounting concerns over the strength of the US economy. Subsequently, the pair managed to break through the wedge pattern that had been constraining much of its price action. As expected, given the swing in sentiment, the pair moved strongly to establish a new high around the 1.1286 mark.
Following the rally away from the wedge pattern, technical analysis of the pair yields some interesting insights. The euro has produced a relatively bullish signal as it broke through the previous high at 1.1075. Taking a look at RSI also indicates the recent bullish activity; however, the oscillator has just climbed into over-bought territory which could signal a retracement in the coming days.
In addition, taking a look at the daily chart shows an ABCD or impulse wave pattern that has just finished completion. This in fact could be subsequently indicating that the time is ripe for a pullback back towards support around 1.1073 before the pair recommences its bullish run.
Therefore, given the various technical indicators reaching into over-bought territory, a pullback by the euro seems to be the likely move in the coming few sessions. There are also some very good fundamental reasons for a retracement as the European banking sector comes under the microscope following Deutsche Bank’s recent earnings disclosures. If the other show was likely to drop the fallout throughout European markets could be quite marked.
Ultimately, given the current world turmoil, global capital markets are highly susceptible to capital flight which is certainly muddying the waters of technical analysis. However, the technical indicators are lining up strongly to suggest that a pullback towards the weekly pivot point at 1.1075 is likely.
