Two major currency pairs, EUR/USD and GBP/USD, could be heading towards an inflection point. It’s not yet clear whether the change will manifest itself as a reversal or a minor ripple, but in this article we set out some scenarios and price levels that might help prepare forex traders for the next few weeks.
Both EUR/USD and GBP/USD have been trending upwards since September 2022, just as the dollar index – which tracks the US currency against a basket of six others including the euro and sterling – has been trending downward. While we expected the September turnaround, the subsequent rallies in the euro and the pound have been stronger than we anticipated.
Bullish scenario cannot be ruled out
In both currency pairs, our preferred bear-case scenarios call for minor new lows this year, below those of 2022. However, the strength of the rallies from the September lows suggests that traders should also keep a bullish scenario in their back pocket.
Our bullish alternative scenarios, which are based on the September lows, make the recent rallies all or part of Elliott wave [i], forming a new upward pattern.
One possible way to evaluate the progress of our potential bull and bear scenarios is as follows. First, watch for confirmation that a downturn is taking effect. A break and daily close (or, ideally, a weekly close) below the first support level on the charts below could serve as initial confirmation of a turn. Next, observe price as it tests the middle group of supports. If the market appears to be "noticing" the levels, that could increase the probability that the downward move is merely a retracement that may produce a bounce.
Might the euro post a fresh low this year?
Euro futures are approaching a major resistance area that hovers between $1.09943 and $1.10221, as shown on the chart below. If price begins to decline from that area, we'd like to see a close beneath approximately $1.07996 as initial confirmation that a downward turn has begun.
If the downturn were to be confirmed, we might then watch for entry opportunities with a bearish bias until price reaches the middle zone of the support levels that we have labelled on the chart.
Could sterling also slide?
Our setups for the British pound are similar to those that we described above for the euro. Resistance sits nearby at $1.2521, with a higher resistance level near $1.2799, as indicated on the chart below.
If a downturn appears to be starting, then $1.2221 could be a key support level to monitor. If that level were to break, it could open up further downside potential. As with the euro, traders might need to adjust their strategy as price encounters the middle set of supports.
Technical indicators on a weekly time frame support the view that a downturn could be imminent. These are the key takeaways from our weekly data:
- Both currencies are entering the downward phase of their dominant cycles, which have a duration of 33 weeks for the pound and 40 weeks for the euro.
- Both the pound and euro are displaying a type of exhaustion signal that is based on wave structure. This is one of the more reliable indicators in our toolbox.
- The past ten weeks represent the first time that our preferred momentum indicator has been positive, after a prolonged negative run while price was declining. This type of initial crossover past the zero line doesn't usually correspond with the ultimate low. In our view, the momentum indicator suggests that the market needs to try again to set a new low.
- The dollar index, which is roughly the inverse of both currency pairs, appears to be trying to set a new low. The index is testing an important support area, and the dominant cycles on weekly and daily charts are now turning upward.
As always, we’ll be keeping a close eye on our charts to see how the situation develops for the euro and the pound.
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