Given all the recent excitement surrounding the EUR/USD, traders have been hyper-focused on trading the day-by-day and hour-by-hour swings. However, when high-impact, unprecedented developments come into play (and I’d definitely consider a major central bank opting for a negative deposit rate for the first time in history to be a massive event), it’s important to take a step back and look at a long-term chart. The monthly chart shows a number of bearish technical indications that suggest the EUR/USD may have put in a major top around 1.40, and that the pair may generally fall for the rest of the year.
The first pattern that pops out after even a cursory look at the EUR/USD’s monthly chart is the 2.5-year rising wedge pattern. Despite the seemingly bullish name, this price action pattern shows that buyers are struggling to push the price higher on each subsequent swing. It is a classic sign of waning buying pressure and points to a big drop once the lower trend line is broken.
While a single pattern alone could easily be shrugged off by euro (CME:E6M14) bulls, the confluence of other bearish technical signs augur for more caution. For one, last month’s high came in directly at converging resistance from a six-year bearish trend line and the 61.8% Fibonacci retracement of the 2011-12 drop. In addition, the pair put in a clear Bearish Engulfing Candle* last month; this formation indicates a strong shift from buying to selling pressure and is often seen at major tops in the market. Finally, the EUR/USD’s monthly RSI stalled out and is turning lower off the “60” level, keeping the indicator in bearish territory.
This rare confluence of bearish technical signs indicates that we may have seen the EUR/USD’s 2014 high at 1.40 last month, and that rates may continue lower in the second half of the year. To the downside, patient traders may want to watch the Fibonacci retracements of the 2-year rally as possible targets, including 1.3250 (38.2%) and 1.3015 (50%). Of course, any outlook (and especially one so long-term in nature) should always be subject to revision; in this case, we’d have to seriously reconsider the long-term bearish outlook if rates bounce back toward 1.39.
*A Bearish Engulfing candle is formed when the candle breaks above the high of the previous time period before sellers step in and push rates down to close below the low of the previous time period. It indicates that the sellers have wrested control of the market from the buyers.