For most of the year so far, EURUSD, the most popular Forex pair, has consolidated. It may not look like at first glance over the daily chart, but when the market forms higher lows and lower highs, that is called a triangular consolidation.
Many traders tried to catch a trend on the pair since the year started. Unlike its peers (e.g., AUDUSD), the EURUSD was reluctant to move either way. Bears looked at the bigger picture and pointed to the fundamentally broken common currency. Bulls, on the other hand, saw that the EURUSD had a tough time breaking and holding below 1.08.
4-Months Long Triangle Ended
For the first 4 months of the year, this pair has formed a descending triangle. Such a triangle has its trend lines converging towards a common point, highlighting the contracting nature.
From a technical point of view, the EURUSD contraction started right when the year began. The massive swings higher and then lower were the result of investor’s hesitation in regard to the global economic recession posed by the health crisis. Plus the fact that the USD was and is still viewed as the safe-haven currency of choice.
However this technical pattern broke higher. It did that at the end of April, and bears have attempted to move this down during May. As the lows marked by the end of the triangle held, bulls now focus on the next target – the triangle’s measured move.
In a descending triangle, the longest wave is typically the first one, and all the subsequent segments are smaller. This basic info about a triangle’s formation is enough to help traders identify the right shape of the triangle and ignore the intermediary swings.
If we consider the lowest value in 2020 for the EURUSD as the end of the triangle’s longest segment, it means that this is the triangle’s measured move. Or, the distance the price travels from the end of the triangle, to confirm the consolidation.
The implications here go beyond just this market. If the EURUSD confirms the triangular pattern by traveling the measured move in the period ahead, the USD must have peaked. Further, a risk-off environment should be discounted as a lower USD is correlated with higher stock prices.
It makes the rest of the Q2 2020 extremely interesting – is the EURUSD break higher a sign that risk-on sentiment continues?