EUR/USD Technical Update (FXE)

As the euro FXE trades lower today, we should check out the techincals and see what the picture is painting in this respect. Obviously, the fundamentals of the euro are continuing to deteriorate and most analysts expect the euro to fall further, from 1.20 to as low as parity. We had a large leg lower today, after Egan-Jones downgraded Spain (which you can read about here). So, where is the next move and what should traders be looking for?

From what I can see, a pattern is forming. Back on Wednesday, the cross took a leg lower and then traded sideways in a range for the better part of a week, making lows along the bottom trend line and rallies capped largely by moving averages. So, if the pattern holds, look for the EUR/USD to enter a new, lower range from ~1.2470-1.2550. 1.2550 was pretty sticky on the way down, then acted as resistance as we tried to break 1.2500, and so should cap any move to the upside. On the other side, the low this morning was near 1.2460 and 1.2450 will most likely act similarly to the way that 1.2550 acted on the way down. Obviously, there is headline risk which will shift these ranges, but this has been the pattern and it should continue: move sharply on negative news then trade sideways.

It is important to note that certain technical indicators are now more neutral than they were a week ago. For example, last week the RSI read a sell signal but it now reads neutral. Remember that, even as conditions in Europe worsened, the EUR/USD went sideways for about 3 months. The point is to not expect a continuous, straight-line, downward move. The rate will go into periods of decline and periods of stagnation, so trading the ranges is probably a better strategy for short term traders, whereas longer term investors may just want to pick a point and short the pair.