Title: EUR/USD and GBP/USD Momentum Indicators Point to Potential Short-Term Reversal Risks
Author Credit: Original article by Matt Weller, CFA, CMT; summarized and expanded for educational purposes.
As global markets enter a pivotal stage mid-way through 2024, analysts and forex traders are focusing sharply on the evolving dynamics of two major currency pairs: EUR/USD and GBP/USD. These pairs, reflecting the broader relationship between the U.S. dollar and major European currencies, have recently displayed signs of potential short-term reversals. According to analysis by Matt Weller, CFA, CMT from FOREX.com, the key drivers behind these signals involve technical indicators that suggest waning bullish momentum even as fundamental factors remain mixed.
This comprehensive overview expands on the original insights from Matt Weller and includes in-depth technical and fundamental analysis to help traders form informed views on short-term trading risks surrounding the EUR/USD and GBP/USD currency pairs.
Technical Overview: EUR/USD Showing Bearish Divergences
EUR/USD, the world’s most traded currency pair, has shown persistent strength in recent months. However, momentum indicators now suggest that the rally may be losing steam.
Key technical indicators:
– Relative Strength Index (RSI): The RSI has plateaued and is rolling over from overbought territory. Historically, this indicates that bullish momentum is weakening.
– MACD (Moving Average Convergence Divergence): While the EUR/USD price recently made a higher high, the MACD histogram failed to confirm this move with a corresponding high, suggesting a bearish divergence.
– Price Action: The EUR/USD is currently testing key resistance at 1.0900-1.0950. This level has provided stiff resistance in recent months, with prior rallies failing to maintain upward momentum beyond this region.
– Fibonacci Retracement: The currency pair remains below the 61.8% Fibonacci retracement of its 2023 decline, which adds technical selling pressure near the 1.0980 level.
– Chart Patterns: A potential double-top pattern may be forming on the 4-hour and daily timeframes, hinting at a reversal scenario should the neckline near 1.0800 break.
If these momentum signals persist and the currency fails to consolidate gains, we could see a test of previous support around 1.0750, with increased downside risk toward the 1.0650 level should bearish sentiment take hold.
Fundamental Considerations for EUR/USD
While technical analysis points toward a potential short-term reversal, the fundamental backdrop remains nuanced for EUR/USD.
Key drivers:
– European Central Bank (ECB) Policy Outlook: The ECB has begun signaling a more dovish policy stance, suggesting potential rate cuts ahead, possibly as soon as Q3 2024. Any confirmation of this shift would reduce demand for the euro against the dollar.
– U.S. Federal Reserve Stance: The Fed, in contrast, remains data-dependent but generally hawkish based on inflation data. Sticky inflation and strong wage growth in the U.S. could delay any rate cuts. This diverging monetary stance supports the dollar on a relative basis.
– Economic Indicators: Recent Eurozone PMIs have shown pockets of resilience, although German industrial orders and broader eurozone business sentiment remain subdued. Without clear economic improvement, upside in EUR/USD may remain capped.
– Geopolitics: There remains an undercurrent of uncertainty driven by geopolitical flare-ups in Eastern Europe, which tend to weigh on the euro due to regional risk factors.
GBP/USD: Momentum Shifting Despite Bullish Breakout
GBP/USD had shown a promising technical breakout earlier in the month, driven by signs of domestic strength and softening U.S. data. However, the momentum behind these moves is also showing early signs of reversal.
Key technical signals:
– RSI Divergence: Much like EUR/USD, GBP/USD has posted a new local high near 1.2750 without the RSI confirming the same. RSI divergence is often one of the clearest early warning signs of impending revers
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