Euro Bursts Out but the Rally May Be Already Over

Beware The EUR/USD Breakout

After almost two months of choppy trading inside a tight range, the Euro finally broke through and staged a bullish move that took the pair very close to the key resistance at 1.1500. However, this movement is likely due to US Dollar weakness, rather than Euro strength.

The U.S. Retail Sales and Core Retail Sales were a big disappointment last week, with the former posting a -1.9% change (forecast 0.0%) and the latter showing -2.3% (forecast 0.2%). These abysmal numbers are likely the result of the accelerating inflation and the rise in Omicron cases. The US Dollar Index (DXY) dropped to levels that were last seen in early-November 2021 but the greenback recovered some of the losses at the end of the week.

Key Events for the Week Ahead

The fundamental scene is lacklustre this week, without major market movers on the calendar. Monday, U.S. banks are closed in observance of Martin Luther King Day but the Eurogroup Meetings take place in Brussels, which may trigger some volatility; however, major moves are not expected.

Tuesday at 10:00 am GMT the German ZEW Economic Sentiment comes out and is anticipated to post a reading of 32.1, an increase from the previous 29.9. This is a survey of about 300 German professional analysts and investors who are asked to give their opinion on a 6-month outlook for the German economy. Usually, the survey has a medium impact but given this week’s lack of releases, it may have a stronger effect.

The last notable release of the week comes Thursday in the form of the Philly Fed Manufacturing Index. This is a survey of about 250 manufacturers from the Philadelphia federal district and acts as a leading indicator of economic health. The expected reading is 19.9, while the previous was 15.4.

Technical Analysis – EUR/USD

The pair is currently trading at 1.1420 and although the bullish momentum took it to a high of 1.1483, it looks like the rally is already wavering. The resistance at 1.1430 is not clearly broken, the pair couldn’t even challenge the key handle at 1.1500, and the upper barrier of the diagonal channel is still in the way.

The Relative Strength Index is climbing without momentum and is already showing bearish divergence when compared with the last significant swing high. The MACD lines are mildly spread apart, which shows some momentum but this is a lagging indicator, meaning that it can change direction with a delay.

If the pair cannot climb above 1.1500 with authority, the most likely scenario is a drop into the 50 days Moving Average but another period of choppy price action is not out of the question either.