Inverse Head and Shoulders Spotted on EURUSD Hints at a Potential Rally to 1.0970
Thanks to yesterday’s better-than-expected data from Germany, EURUSD finished with gains despite risk aversion dominating market sentiment. The currency pair closed higher at 1.0852 after bottoming out at 1.0804.
It also helped the euro that the German IFO Business Climate report for February topped expectations. The survey printed higher at 96.1 than the 95.0 forecast and January ‘s 96.0 reading. This suggests that business feel relatively more confident about economic conditions than analysts expected and than in January.
Today, there are no reports due from the euro zone. We do, however, have the US consumer confidence report due at 3:00 pm GMT which could affect EURUSD. The report is eyed to come in at 132.6. A better-than-expected report could strengthen the dollar and push the currency pair down. On the other hand, a disappointing figure could weaken the dollar and help EURUSD trade higher.
On the 4-hour time frame, we can see that EURUSD has some room to trade higher and still maintain its downtrend. The currency pair has recently made a higher low to follow a series of lower lows. Consequently, an inverse head and shoulders pattern has materialized. This chart pattern is widely considered as a bullish reversal signal. A close above yesterday’s high at 1.0871 would effectively break the neckline resistance and could trigger a rally to the confluence of resistance around 1.0970. For one, this price aligns with the falling trend line when you connect the highs of December 31, January 16, and February 3. The 200 SMA also falls on this price. Lastly, the 61.8% Fib level coincides with it when you draw the Fibonacci retracement tool from the high of January 31 to the low of February 20.
On the other hand, a drop to below yesterday’s low at 1.0804 would invalidate the inverse head and shoulders. It may then indicate that EURUSD could fall to its recent lows around 1.0780 or maybe even to its April 2017 lows at 1.0580.