The euro broke down significantly to plunge below the 1.13 handle, reaching towards the 1.1250 level. That was my target for a while, but I do not necessarily think that we will not break down below that level given enough time. That being said, the daily candlestick is a hammer, and that is a bullish sign, at least for the short term. If we break above the top of the candlestick, then it is possible we could go looking towards the 1.14 level, but we are clearly in a downtrend and at this point the US dollar was a little bit overextended.
Any rally at this point in time should offer a nice selling opportunity at the first signs of exhaustion. It is worth noting that the US Dollar Index has broken out from a very important level in the form of 94.50, but we had gone straight up in the air for the last couple of days. A bit of a pullback makes sense, but it should only offer more value. The market showing signs of exhaustion near the 1.1450 level might be a decent trade, but it is not until we get above the 1.16 level that I would start to think about buying this market, especially now that the 50-day EMA is hanging around that region.
On the other hand, if we were to break down below the bottom of the candlestick, then the 1.1250 level would get crushed. At that point, I would anticipate that the euro could drop all the way down to the 1.10 level over the longer term. I think that is the longer-term target, as the European Central Bank continues to look very dovish, while the Federal Reserve has ended up tapering its bond purchases, so it is very likely that the US dollar will continue to strengthen over the longer term. Expect a lot of choppy behavior, but I will let the market bounce for a couple of days before shorting yet again as the trend has so far been proven worthy more than once, and I think we will continue to see plenty of trend followers get involved. The short-term bounce is probably the best thing that could happen for the US dollar.
