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This EUR/USD sell-off could be just the beginning

Despite the euro falling to a six-month low against the dollar, there is a strong chance we could see substantially more losses come into play should EUR/USD break the $1.1554 support level. 

CFDs are a leveraged product and can result in losses that exceed deposits. Trading CFDs may not be suitable for everyone, so please ensure you fully understand the risks and take care to manage your exposure.

The euro is well into its second consecutive month of losses against the dollar, as the bullish trend of 2017 comes under significant pressure. Traders have become very used to the notion of dollar weakness of late, with the dollar index losing over 10% last year. However that could be changing, with a dollar resurgence seemingly on the cards. EUR/USD accounts for over half of the weighting of the dollar index, and thus the focus on this pair is even more important as a gauge of dollar strength. From a fundamental perspective, the expectations of a blockbuster year for eurozone growth have been somewhat unfounded, with today seeing a host of purchasing manager index (PMI) figures continue the decline that has been evident since the turn of the year. With gross domestic product (GDP) expected to come in at the lowest level since early 2017 and inflation significantly below target, at 1.2%, it comes as no surprise that the euro has been suffering of late.

The monthly chart below highlights the wider picture for EUR/USD, with the recent decline coming at the hands of an important confluence of resistance. The meeting of two trendlines, the 200-month simple moving average (SMA), and 61.8% Fibonacci retracement signals a heightened chance of a market reversal rather than a retracement. Looking at this perspective, the creation of lower highs since the 2008 high points towards the 2017 gains as potentially being a retracement, hence the importance of the 61.8%. It is also noticeable that the longer-term trend also exhibits higher highs and higher lows since 1985. However, it is notable that the euro only came into existence in 1995, making data before then less reliable. It is also worth noting that the 76.4% retracement hit in 2000 has not been followed up by a move into the subsequent 76.4% pullback over the past decade. This points towards a potential next leg lower into the 76.4% level, which would complete the prospective trendline dating back to 6382.

The weekly chart highlights the fact that we are approaching the key $1.1554 level, below which we would no longer be creating higher highs. That is the key breakdown point which would signal a significantly higher chance of an extended long-term sell-off in EUR/USD. Until we break below that $1.1554 level, there is still a strong chance that we will see a rebound to avert a more radially bearing long-term picture coming into play. However, with the recent breakdown seeing the price fall below the 76.4% retracement, we are looking increasingly likely to see a break below $1.1554, leading to a substantial extension of the losses seen over the past two months.

This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.  Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. 

CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.

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