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. 

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.

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