The EURUSD pair has surged back towards the 1.1300 resistance level, due to a major correction in the US dollar index and a much higher than expected EU inflation reading.
As the ECB meeting approaches today, the main technical play is watching the price movements around a large wedge breakout from last week, which caused a near 200 points down move.
Back to the inflation reading. This week’s record of 5.1 percent in January, defying expectations of a slowdown and adding to the European Central Bank’s headache ahead of its policy meeting on Thursday.
It should be noted that high prices were primarily driven by energy, which spiked to 28.6 percent, compared to 25.9 percent in December, according to the EU statistics.
Additionally, the next-highest increases were in food, which was up by 5.2 percent after rising 4.7 percent last month. Core inflation, which excludes volatile components like energy, food, alcohol and tobacco eased to 2.3 percent from 2.6 percent in December.
While the ECB targets headline inflation, it closely watches core prices as an indication of medium-term price developments. This could make for more price volatility in the euro and its crosses today.
Sentiment is also unchanged, and neutral, which leads me to believe that the EURUSD pair could be about to unwind all of these weeks gains and enter into a 1.1100 to 1.1300 range.
According to the ActivTrader market sentiment tool 51 percent of traders are at least still bullish. This usually means range bound trading is incoming.
EURUSD Short-Term Technical Analysis
The four-hour time frame shows that the EURUSD pair has broken above the neckline of a large head and shoulders pattern, located around the 1.1240 area.
Although the neckline resistance has cracked, I think a much-larger head and shoulders pattern could form, and we could still see this play out towards the 1.1050 or 1.1000 area.
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EURUSD Medium-Term Technical Analysis
Looking at the daily time frame and the EURUSD pair is at a critical juncture and has tested back towards the area of a former key wedge breakout.
In the near-term, this looks to be setting up the 1.1300 level is going to be huge. If we see a breakout then 1.1500 is possible, while a rejection could cause a drop to 1.1100 to 1.1000.
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