eurusd
The ECB week has started with the EURUSD pair giving up some gains. After reaching as high as 1.2175 last Friday, the pair formed two reversal patterns – a double top and a head and shoulders. Both patterns point to lower levels, and a move back to the 1.20 seems to be in the cards.
The ECB is expected to further ease the monetary policy conditions on Thursday, but a lot depends on how it will do so. Because the central bank pre-committed in October, most of the easing may already be priced in the market. However, the ECB may still surprise, especially because the EURUSD exchange rate is so strong.
When the EURUSD reached 1.20 for the first time in 2020, the ECB intervened and expressed its concern about the strong rate. Fast forward a few months, the EURUSD is even higher, with the ECB having one last shot this year at sending it back below 1.20.
Normally, it is not the central bank’s role to influence the exchange rate. However, as Lagarde hinted, the EURUSD, not any other exchange rate, is the one that does matter for the ECB.
The orange line on the chart below represents the measured move for the head and shoulders pattern. Because the market also formed a double top during the head’s formation, it reinforces the bearish setup. Traders may want to stay short with a stop at the highs and with 1.20 as a target.
