The EURUSD pair started the year with a gap higher. On the first trading day of the year, it gapped higher and climbed all the way back above 1.23. However, as it turned out, it did so only to form one of the most powerful reversal patterns of them all – a double top.
From that moment on, the pair reversed over two big figures (one big figure equals a hundred pips). Plenty of things are to be said about the EURUSD’s drop and why it may be the drop that bears looked for since the March 2020 dip.
What’s Unique About This EURUSD Reversal?
To start with, it does not look like a dollar move. If it were so, the AUDUSD would fall as well, the stock markets in the United States too, and so on. Instead, the EURAUD, EURGBP, and EURCAD displayed similar weaknesses.
Moving forward, the USD index is extremely oversold. The mega-consensus is that the EURUSD will continue to strengthen, moving above 1.25 or even more this year. However, if that is the case, the Dollar index will further decline because the EURUSD makes more than 40% of the currency pairs part of the Dollar index basket.
The European Central Bank (ECB) is not indifferent, as pointed by yesterday’s Lagarde speech. The President of the ECB mentioned several times that the exchange rate is closely watched by the ECB, especially its effects on inflation. Moreover, the central bank will not hesitate in easing financial conditions further, with the focus being on the extension of the Pandemic Emergency Purchase Program (PEPP) beyond the current horizon and to the end of 2021.
On the other hand, the Fed is in no hurry to extend the bond-buying program. Instead, the Fed insists more on fiscal easing, and the debate on monetary policy takes place on different topics (e.g., a continuation of the current programs and even the possibility of tapering).
From a technical analysis perspective, the EURUSD pair started a series of lower highs and lower lows after the double top formation. This kind of a series defines a bearish trend, and if the price remains below the trendline, traders will try to sell every bounce.
Only a week ago, the EURUSD was at the highs. Therefore, it is still early to say if the current reversal is meaningful or not in the long term. In the short term, however, the round number (i.e., 1.20) attracts.