EUR/USD may rise after key breakout - what are the risks?

EUR/USD could be setting up to test highs from 2018, but there are a couple of technical warning signs hinting that a euro turn lower may be brewing.

EUR/USD technical analysis - talking points

  • Weekly chart hints EUR/USD setting up for further gains
  • Risks to the downside include RSI and rising net-long bets
  • Next critical resistance appears to be around 2018 highs

Euro technical analysis

On the weekly chart, EUR/USD is attempting to break above long-term falling resistance from 2011, signaling the potential for a reversal of the dominant downtrend since. This has exposed peaks from 2018, which would likely be the next major obstacle to the upside. Negative relative strength index (RSI) divergence warns that upside momentum is fading however, warning of a false breakout.

Read more about trading EUR/USD and forex

Zooming in on the daily chart, the euro is struggling around the 38.2% Fibonacci extension at $1.2128 using the March to August trend with the pullback to November lows as the retracement. Still, the break above August highs was a significant technical achievement, underpinned by the bullish ‘golden cross’ that formed between the 20-day and 50-day simple moving averages (SMAs) in early November.

A push above the 38.2% level exposes a midpoint at $1.2290 on the way towards highs from 2018. Otherwise, in the event of a turn lower, the zone of resistance between $1.1932 and $1.2011 could establish itself as new support. This is also where the moving averages would come into play. These could maintain the focus to the upside, while a drop through them could open the door to testing the September low for further directional cues.

EUR/USD IG Client Sentiment outlook

IG Client Sentiment (IGCS), which is typically a contrarian indicator, paints a more worrying picture for EUR/USD. On 9 December, the tool showed that 34.37% of retail traders were net-long EUR/USD. Upside bets climbed by 3.41% and 23.12% over a daily and weekly basis respectively. This is as bearish exposure decreased by 8.74% and 12.93% over the same period.

Moreover, retail investors were the most net long since early November. Based on these developments, the changes in sentiment warn that the current price trend may soon reverse lower despite the fact traders remain net short overall. From a psychological perspective, that could mean that traders may start to increasingly bet on a would-be euro bottom if prices fall in the days ahead.

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