A Big Break is Coming in EURUSD?
The currency market is famous for being one of the first to react to news events, monetary policy decisions, etc. Its high volatility attracts speculators and investors alike. However during such disturbing economic times , the currency market’s volatility pales in comparison to the 2008 financial crisis.
The EURUSD daily chart above reflects the state of the Dollar Index (DXY) since the start of the pandemic. A market that makes higher lows and lower highs is said to be in a range, as reflected by the EURUSD pair.
A break seems imminent. Such long consolidation periods are common before the start of big trends. When there is no clarity as to what the next direction will be, investors prefer to sit on the sidelines.
Which Central Bank Wins?
Before the current health crisis, the USD benefited from higher interest rates. The Federal Reserve hiked the federal funds rate in a period when the ECB kept the interest rate below zero. As such, the EURUSD exchange rate dropped from 1.25 to 1.08, reflecting the interest rate differential.
The health crisis forced the Fed to drop the rates close to zero and to engage in other unconventional monetary policy decisions designed to further ease the wounds caused.
Easing is the name of the game. While the ECB has negative rates, the Fed Quantitative Easing program dwarfs the ECB’s Asset Purchase Programs. In other words, it is up to the market to decide which central bank’s policy is more aggressive, and what currency will weaken the most – the EUR or the USD?
The triangle above reflects the market’s interpretation of the various announcements from the Fed and the ECB. At some point, the triangular consolidation will end, and the market will begin trending. The big question is – what will the direction be?
Such triangles are tricky patterns. They act as continuation patterns as well as reversal ones. However, in both cases, they have a measured move.
Technical traders measure the length of the longest segment and project it from the triangle’s breakout point. Either bullish or bearish, the measured move is enough to create a long-standing trend. All traders need to do is to wait for a break to come before trading the measured move. For now, patience remains key.