The EURUSD rallied back towards the 1.2200 level on Friday, despite the United States posting its strongest Core PCE inflation number since 1992, and US stocks taking a tumble on the weekly price close.
One of the reasons that the EURUSD pair rebounded from the 1.2130 region is that large amounts of negative MACD price divergence were reversed on the lower time frames.
Last week I mentioned that negative divergence was present, and that bulls may be lurking around the 1.2130 level, in expectation of a coming price rally towards the 1.2300 area, and possibly higher.
Remember, the EURUSD pair is in an uptrend across the upper and the lower time frames, meaning that traders should be buying into dips, so this sudden recovery was not unexpected, despite the hot Core PCE data.
Financial markets will likely make their next big move after the release of US jobs data this week. It is a shortened trading week due to various bank holiday, so we could see plenty of market action between Tuesday and Friday as traders get positioned for the headline number on Friday.
Personally, I expect that the EURUSD pair will continue to head higher, despite fears over QE taper due to inflationary pressures. EU inflation this week could also be a big market mover for the single currency if any significant changes are present in the headline number.
Sentiment towards the EURUSD has dropped since last week. The ActivTrader market sentiment tool shows that some 62 percent of retails traders are negative towards the EURUSD. This is a good sign for bulls.
EURUSD Short-Term Technical Analysis
The EURUSD pair has formed a broadening wedge pattern across the four-hour time frame. Last week a false breakout under the wedge took place, and the price is now back inside the wedge.
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These patterns are typically categorized as bearish. However, I think we could see the pattern invalidated. Bulls need to move the price above the 1.2300 level to do this.
If the pattern was invalidated a huge breakout in the EURUSD pair towards the 1.2440 price area is very likely according to the chart.
EURUSD Medium-Term Technical Analysis
EURUSD bulls need to breach the 1.2330 resistance area to create a huge, inverted head and shoulders pattern, and subsequently invalidated a large head and shoulders pattern.
This week it is critical that the EURUSD pair reaches the 1.2330 level over the to cement its future upside price path. I suspect the EURUSD pair is headed towards the 1.2700 to 1.2800 price area over the long-term.
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