EUR/USD – A larger retracement to come?

Strong rebound off support

The euro has given back some of its gains against the dollar over the last week, after rallying strongly to break out a descending channel over a couple of weeks prior.

Today the pullback entered into interesting territory, between the 50 and 61.8 fib levels, where already it is finding some support. That area also coincides with the top of the channel it has just broken through.

It should be an interesting test for the pair. On the one hand, a 38.2% retracement of the longer-term decline – May highs to August lows on daily chart – would be very shallow and the rotation off that earlier mentioned support may suggest there’s more to come.

On the other, a break below the 61.8% level and channel high on the 4-hour chart would be a major blow to the euro recovery and could point to further pain to come.

The strength of the rebound combined with where it occurred may indicate the former looks more likely. With so much US data to come this week and the recent trend being soft, that may get a helping hand.

The flipside to this is that Fed policymakers prior to the blackout period remained committed to the taper, which may limit the downside potential, and a few positive data surprises this week could see the dollar quickly find itself back in favour.

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