With less than two months left of the trading year, the financial world prepares for the U.S. elections outcome and some form of Brexit resolution. The two were supposed to be the highlights of the year, but the COVID-19 pandemic stole the show.
As such, central banks and investors needed to adjust quickly. All central banks in the developed world lowered the interest rates close to zero and eased the monetary policy. Effectively, fundamental analysis lost its momentum as all policymakers reacted in a similar manner.
Traders, therefore, turned to technical analysis. Viewed by many as an “educated guess” about where the price may go, technical analysis is based on interpreting past market behavior to forecast future one.
Reversal and Continuation Patterns on the EURUSD Pair
The EURUSD is the most popular currency pair among retail traders. One of the reasons, and perhaps the most important one, is that the pair has the lowest possible spread between the bid and the ask prices.
When the pandemic hit the Western world, the EURUSD was one of the pairs that reacted the most. Initially, it moved lower due to the lack of the USD in the financial system. When uncertainty reigns in the markets, investors typically find shelter in the safety of the world’s reserve currency.
The pair, therefore, dropped from 1.15 to 1.07 in two weeks’ time. However, it consolidated after that for two months in a triangular pattern. Whenever a triangle forms at the end of a trend (the EURUSD dropped from 1.25 on bigger timeframes), the focus sits on the price to break the upper trendline. That is a reversal signal pointing to a change in market conditions.
After the price broke higher, it reached 1.14 at the June 2020 ECB meeting. In the weeks that followed, it formed a different type of triangle – one that acted as a continuation pattern.
The breakout led to a sharp move higher all the way to the 1.20 level. However, since August, the pair is unable to move higher.
Moreover, it formed another reversal pattern, this time a head and shoulders. And, at the “head” of the pattern, it put a double top – just another bearish pattern.
The EURUSD is currently retesting the head and shoulders’ neckline, and bears may argue that they have a solid case to go short. However trading needs more than technical analysis alone – fundamental analysis matters too.
Therefore, the chances are that the EURUSD pair will continue to consolidate around the current levels until the U.S. elections are behind us. Only then will we see if the head and shoulders pattern held.