An overwhelmingly bearish EURUSD could have many traders tempted to jump on the bandwagon in an attempt to squeeze a few extra pips out of the pair. However, despite what the EMAs might be telling us, the EURUSD could be about to make a fairly spectacular recovery. Specifically, the recovery could come as a result of a potential three-drive pattern.
Looking at the daily chart, there is a relatively obvious bullish channel forming and the recent plunge seems to have stalled at the downside constraint. Consequently, the EUR should be making a corrective movement higher in subsequent sessions.
However, the correction to the upside might be somewhat more voracious than we would normally expect it to be, as a result of a nascent chart pattern.
Specifically, the euro could be about to complete another leg of a rather large bullish three-drive pattern which could see the pair go as high as the 1.18 handle. Whilst the retracements generally fit the criteria required for this pattern, resistance around the 1.1250 mark would need to be broken to confirm that the final leg was taking place. This being said, if the pair can break out here, Parabolic SAR is indicating that a strong trend reversal could occur.
Looking at the stochastic oscillator, it is shown that buying pressure should be building strongly now that the pair is heavily oversold. As a result, increasing liquidity later in today’s session could see the euro extend recent gains and trend strongly upward, potentially breaking through the important 1.1250 resistance level. However, it is worth noting, an impending crossover of the 100 day EMA with the 12 and 20 day EMAs could limit momentum to a degree.
Despite the potential limiting effects of EMA activity, the ‘smart money’ seems to agree that there could be some significant upside potential for the pair. Specifically, a quick look at the Commitment of Traders report shows a clear bias in long positions for the EUR. Moreover, the latest release demonstrates that long positions have actually increased slightly. In contrast to this, short positions have plunged quite significantly which could be signalling that the pair is testing a new bottom.
Ultimately, there is still the issue of the looming Federal Reserve rate decision which could easily upset any potential recovery. However, given the amount of pricing-in much of the market has done in response to the hawkish Fed rhetoric, a rate hike could have a rather muted effect and leave the EURUSD on track to complete the three-drive.
Additionally, if the Fed elects not to increase US rates, the fallout could actually supply the requisite momentum to push this pair to complete the move to the 1.18 handle. Therefore, it could be a very interesting number of weeks for the EURUSD, and this pair is sure to be watched even more closely than usual.