EURUSD Technical Outlook - Euro to Drive DXY, FX Volatility Soon
The EURUSD continues to move sideways in narrowing fashion, with general price action taking on the shape of an ascending wedge. The diminishing vol since late November is occurring at an unsustainable pace, and in the coming days/weeks should lead to the Euro freeing up for a directional move.
Given that EUR accounts for 57% of the DXY it will have that index moving in the opposite direction once a direction is settled upon. This will also bode well for FX volatility in general.
Which direction will we see a resolution? That is difficult to say and a question that doesn’t necessarily need to be answered at this time. The trend in the EUR is decisively down, which suggests we could see the wedging in vol expand to the downside.
However, the ascending nature of the wedge suggests we may be seeing some slight strengthening out of the single currency, and thus a pop to the upside may be nearing. The best way, in my view, to play these patterns is to simply wait for a breakout.
If the underside trend-line of the pattern is taken out with a close below 11272 as confirmation, then look for 11186 and 11100 to quickly come into play. On the flip-side, if a close develops above 11386, then look for the May trend-line to get quickly challenged followed by 11495 or higher.
Wedges/triangles hold a fairly high degree of risk of presenting a false breakout before sustaining in a direction. With that said, we could see one of the above scenarios fail first before the other confirms. The way I handle this, is simply go with the initial break and if stopped out enter again once the other confirming signal is in place. It is a good idea to limit the number of entries, though, to keep from getting chopped up on one idea.