The euro is looking a little bearish today, after finding resistance around 1.3830 on Friday, a previous level of support and resistance. The pair ended the session on Friday close to its opening price, leading to the formation of a doji candle on the daily chart, a bearish reversal indicator. Also supporting the bearish view this morning is the stochastic, which has now crossed in overbought territory, while the RSI is also showing the pair as overbought. I don’t believe this changes the medium/ longer term outlook for the pair, which as far as I’m concerned is still bullish. However, we could see the pair pull back and test 1.3710, previously this year’s highs, as a new level of support. The pair should find support along the way around 1.3792 (previous resistance and 20-period SMA on 4-hour chart), 1.3773 and 1.3740. If the pair does push higher, the initial target would be last week’s highs of 1.3831, followed by 1.3866 and 1.3950 (prev support and resistance, and descending trend line, dating back to 13 July 2008).
Sterling is continuing to struggle to break higher against the dollar, with the descending trend line, dating back to April 2011, providing significant resistance for the pair. Clearly though, a large number of traders are still bullish, which is why we’re not seeing a significant pull back from this level. Quite often when we see so many attempts to break through a key level, the level is eventually broken and I see no reason to believe that won’t be the case on this occasion. This probably has more to do with people’s bearish outlook for the dollar than a bullish view on sterling, but that’s not important. The 4-hour chart suggests we may see more sideways trading yet, before we see a break higher or lower. The range is getting smaller, which increases the odds of a breakout in the next couple of days. If we see a break above the descending trend line on the 4-hour chart, dating back to last Wednesday, we should see a strong attempt at a break above the longer term trend line, mentioned earlier. A break of this should prompt a move towards the even longer term trend line, which dates back to 2 August 2009, around 1.63. Alternatively, if we see a break lower, the pair should find support around 1.6168, 1.6156, 1.6150, 1.6136 and 1.6115.
The weakness in the dollar is putting a lot of pressure on a key support area in this pair. There’s been a lot of selling pressure around 97.25 in the last few sessions, where the 200-day SMA intersects the ascending trend line, which dates back to 25 February. The pair did close marginally below this level on Thursday, although it quickly closed back above here on Friday. Unless we see a significant break below this level, the outlook for the pair will continue to look bullish. The pair is edging higher again this morning and is currently finding resistance around 97.73, from the 20-day SMA (middle bollinger band). If it breaks above here, it should find further resistance around 98, from the descending trend line dating back to 17 October highs, followed by 98.38, from the 50-day SMA. If we do see the 200-day SMA support significantly broken, it will be very bearish for the pair, with the next support coming around 96.55 and 95.80.
Craig Erlam is Market Analyst at Alpari (UK). He joined Alpari (UK) at the beginning of 2012 after four years in the financial services industry, including working at Goldman Sachs. Craig writes market commentary that regularly appears on websites including The Financial Times, Reuters, BBC, The Telegraph and FOX Business. He also provides insight and analysis for clients which he posts daily on Twitter and the Alpari (UK) website. You can also find Craig on YouTube where he gives short market updates, including charting analysis.