The euro broke through the psychologically and minor structural support level at the 1.14 handle on Friday. A lot of this will be due to the fact that the Federal Reserve is almost certainly tightening much more aggressively than the ECB is, as the ECB is just now starting to acknowledge the existence of inflation. Because of this, it does make sense that we would see this market drop, and it now looks as if we are in the midst of confirming a “double top.”
Breaking down below the bottom of the candlestick for the trading session on Friday would be a very negative sign, as it would be a confirmation of the move lower. At that point, we could very easily find ourselves going towards the bottom of the overall consolidation area that it looks like we are trying to form. That means we could go as low as 1.12 before it is all said and done. I think that we will continue to see a lot of noisy behavior as there are so many questions about where we are going next when it comes to geopolitical risk, financial risk, and of course inflationary risk.
It does make sense that we would continue to see negativity in this pair, because the ECB is light years away from tightening, while the Federal Reserve has already promised to do so. That being said, the area just below this candlestick is noisy, so you need to keep that in the back of your head. The market will continue to be very noisy, as there are a lot of of open-ended questions to deal with at the moment.
On the other hand, if we were to turn around and take out the top of the Thursday candlestick, that would be a very bullish sign and could send this market much higher, perhaps reaching towards the 200 day EMA above, maybe even the 1.16 handle. There is a lot of noise above, so I do think that it is easier to go lower than it is to go higher, but that does not necessarily mean that we have to. Anticipate short-term rallies to be selling opportunities in what has been a very difficult background to trade.
