The EUR/USD pair initially fell during the course of the day on Thursday, but as you can see found enough support just below the 1.27 level to turn things back around and form a nice-looking hammer. The hammer of course is a very supportive looking candle, and therefore suggests that we could get a bit of a bounce. If we can get above the 1.28 handle, we believe that the market will then head to the 1.30 level, with the area continuing to offer significant resistance. Because of this, we are simply waiting for some type of resistant candle to sell. On the other hand, if we break the bottom of the hammer, we believe that is a very strong sell signal as well.
We have actually no interest in buying this market until we get above the 1.30 level, and then at that point time we believe that the market would probably head to the 1.32 level, or perhaps even the 1.3250 level. That area is the site of a significant gap, and if we were to get above there we think that the market would then start to change its attitude overall, probably heading towards the 1.35 handle given enough time. However, there’s really nothing that suggests that this is going to happen anytime soon, so we think that rallies will simply continue to be selling opportunities.
Ultimately, this market could drop as low as 1.20, but that of course is a very long-term possibility. The market should continue to be a “sell on the rallies” type of situation, and therefore we continue to favor the US dollar longer term anyway. The European Central Bank should start to loosen its monetary policy fairly soon, and that of course will continue to drive this pair down as well. There will be several stops on the way down to the 1.20 handle, but we believe that the longer-term trend is starting to take over again. The 1.25 level is probably the next area we head to on a break down below current levels.