EUR/USD – Edging lower into the Fed meeting

Can it break higher again?

Price action at the back end of last week in EURUSD was chaotic, to say the least.

From Christine Lagarde putting across a dovish case for the central bank which the market completely disregarded to the dollar soaring on Friday on the back of a surprise spike in the employment cost index – an inflationary signal – we certainly saw plenty of action that we now have to make some sense of.

At times like this, technical levels can often take a backseat as these economic events bring a significant element of unpredictability, as we saw. Now that the dust has settled, where do we find ourselves?

For one, we’re back inside the descending channel and the breakout that we saw on Thursday is barely relevant. It failed around a descending trend line just above the channel but that may not have been the case, if not for the data on Friday.

What matters is what comes next. And what we’re seeing currently is the rally back into the top of the channel losing momentum, which suggests another breakout may be a struggle. So the rebound off the mid-point of the channel may prove to be temporary support.

The top of the channel coincides also with the bottom of the 55/89-period SMA bands on both the daily and 4-hour chart, which would suggest we’re still in a bearish phase for the pair.

The next test below is once again the October lows around 1.1524, where it failed to push below late last week. The fact it held up above here suggests there’s still support for the pair but that may diminish if we continue to see it tested.

Ultimately, the Fed may hold all the cards. A hawkish announcement tomorrow could see the dollar come back into favour and those lows tested strongly. No mention of potential hikes next year and we could see the upper end of the channel being tested again.

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