EUR/USD: Case For A Bounce

 | Nov 24, 2014 10:56AM ET

Given today’s Japanese bank holiday (Labor Thanksgiving Day), it’s not surprising that the FX markets have gotten off to a bit of a slow start. The performance of the US Dollar has been mixed in Asian and early European trade as traders weigh the sustained uptrend against the lack of new bullish catalysts for the world’s reserve currency. Further complicating matters, many US traders may restrain from meanginful trades ahead of Thursday’s Thanksgiving holiday. While US economic data tomorrow and on Wednesday may inject some volatility to the markets, the overall environment favors potential countertrend pullbacks this week.

One pair that may be particularly vulnerable to a countertrend pullback is EUR/USD, which collapsed on the back of some dovish comments from ECB President Mario Draghi on Friday. Draghi’s focus on the Eurozone’s subdued inflation expectations has caused some traders to speculate that the ECB may enact a sovereign QE program as soon as next month.

That said, EUR/USD has stabilized off key technical support at 1.2360 so far today, helped along by a better-than-expected German IFO report in today’s early European session. The monthly survey of German manufacturers, builders, wholesalers, and retailers improved from 103.2 last month to 104.7, beating the expectations of a drop to 103.0. Notably, this marks the first time that the widely-watched index has improved since April, suggesting that the Eurozone economic activity may finally be stabilizing after the precipitous decline in Q2 and Q3.

On a technical basis, the pair remains within its longer-term downtrend, though Friday’s big drop has opened the door for a modest recovery within the context of the overall downtrend early this week. Looking at the 4hr chart, the rates carved out a Bullish Engulfing Candle* on the back of the IFO report, showing a shift to strong buying momentum in the near term. In addition, the 4hr RSI has turned higher from oversold territory, marking a potential trough on the chart.

As long as rates stay above horizontal support at 1.2360, EUR/USD could bounce back toward its bearish trend line near 1.25 in a potentially slower holiday week. Of course, a break below key support at 1.2360 would suggest that the bears have reasserted control of the market and would open the door for a drop toward 1.2300 or 1.2200 next.

*A Bullish Engulfing candle is formed when the candle breaks below the low of the previous time period before buyers step in and push rates up to close above the high of the previous time period. It indicates that the buyers have wrested control of the market from the sellers.