At this point, the market will continue to see concerns with inflation and a lack of growth in the EU as well.
The euro rallied initially during the day on Friday and then gave up the gains to form a less-than-impressive candlestick. However, the previous three candlesticks have formed significant support near the 1.0975 handle and have bounced from there three days in a row. The fact that we ended up forming an inverted hammer suggests that we are going to try that very move again, and if we do break down below there, it could send the US dollar much higher.
In that scenario, I would anticipate that the pair will go looking to reach the 1.050 level, an area that has been important previously. Breaking down below there then opens up the 1.08 handle, and much lower levels after that. The market is obviously doing some type of complex pattern, and the confusion is obvious.
The reason I say this is that we ended up forming three hammers in a row, followed by an inverted hammer. All of this is within the potential bearish flag, and as a result, it does look negative, but it also looks confused. The 50-day EMA sits above and is sloping lower as it crosses through the resistance region above.
The 1.11 level is the beginning of that resistance zone that extends to the 1.12 handle. We would have to break through all of that to continue to go higher, and that takes much more in the way of effort to make that happen. If we do chew through all of that, then I would be very impressed by the euro and would understand that we are more likely than not would be changing direction. Having said that, it would take quite a bit of conviction to make that happen, and at that point, it is likely that we would start to reach towards the 200-day EMA.
Looking at this chart, it is obvious that the market is simply thrown around at the whims of the latest headline it seems, but when you look at the European Union, there is such a huge amount of issues to worry about. The interest rate differential alone favors the United States, as the 10-year yield continues to spike.
At this point, the market will continue to see concerns with inflation and a lack of growth in the EU as well.
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