Price Prediction: Bull Trap Pattern Complete in EUR/USD, New Lows Likely Ahead

Still Diverging Economies, Converging Monetary Policies

While the long-term trend is still negative in the EUR/USD, the most traded forex pair had a very active start to the year, and it seemed that after a long period of weakness, will finally experience a meaningful counter-trend rally against the Greenback. The European common currency moved above key resistance in the wake of the dovish shift by the Federal Reserve, despite the disastrous industrial production reports and the dismal PMIs from the Eurozone.

The weakening US economic numbers also helped the rally attempt, but despite the move above 1.15, the currency failed to extend the move and it plunged back below resistance, to the previously dominant trading range, completing a bull-trap pattern which will likely lead to the continuation of the long-term trend, with all eyes on the previous low near 1.1215.

Long-Term Chart Analysis

EUR/USD, Daily Chart Analysis

Looking at the daily chart, the trend is clearly bearish in the pair, and even though the steeper of the two main declining trendlines have been briefly violated during the recent rally, which made a stronger counter-trend rally a possibility, the broader trendline is in no danger. The oversold MACD readings that developed in the pair have been cleared back in December, and now the indicator is bearish for the first time since early November.

There is considerable support in the 1.1275-1.13 zone, but given the lack of follow-through after the break-out attempt, and the competed bull trap pattern, odds clearly favor a new swing lower in the ongoing long-term downtrend. Targets for the move are found near 1.1135 and in the 1.0850-1.0950 zone.

Short-Term Chart Analysis

EUR/USD, 4-Hour Chart Analysis

The pair is slightly oversold from a short-term perspective, and a move back to 1.1440 is in the cards here. That said, given the proximity of the 1.15 level and the risk/reward ratio of a long-term trade, traders could enter right away, ignoring the short-term setup. A dip below the lower boundary of the broader consolidation pattern would further confirm the continuation of the long-term trend, but should the global risk rally continue, a period of range trading could still be ahead before a test of the lows near 1.1215.

Key Events Ahead for the Pair

Tomorrow we will have the US Industrial Production and Prelim Michigan Consumer Sentiment coming out. Next week, Tuesday will likely see all the US indicators which have been delayed because of the government shutdown, such as Retail Sales, Housing Starts, Existing and New Home Sales, and the Trade Balance. The Eurozone Manufacturing and Services PMIs will be out on Thursday, while all eyes will be on the ECB’s rate decision and the following press conference, and on Friday the Durable Goods report could cause a sizable move in the pair.

Trader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.