As the level of geopolitical headwinds accelerates, the US dollar's status as a safe haven, along with almost certain interest rate hikes on the horizon as recently signaled by Federal Reserve Chair Jerome Powell, keep driving the Dollar Index higher.
As the most heavily weighted currency within the dollar index, the euro spent much of 2021 sinking lower versus the USD. With the outbreak of Russian hostilities against Ukraine, the single currency's descent has escalated. The EUR/USD pair is now at its lowest levels since June 2020.
The trajectory for a continued EUR/USD decline is clear in the technical chart.
The common currency price appears to have found equilibrium, but it's a bearish sleight of hand. The euro is forming another pennant, a bearish pattern within the falling channel, which marks the current boundaries of the supply-demand dynamic driving the currency's tumble.
However, the rate of the pair's decline could get faster. The back-to-back pennants developed at price levels above and below the previous Jan. 28 low, demonstrating the importance of this level as a support and resistance.
The downside breakout of the second pennant will signal that short covering is over and that supply has overrun demand, forcing sellers to lower their offers in order to find interested buyers at lower prices.
This activity should trigger a technical chain reaction, inflating momentum that would keep pushing the pair lower.
Trading Strategies
Conservative traders should wait for the downside breakout, followed by a return move to retest the pattern's integrity before shorting.
Moderate traders would also wait for a downside penetration and a corrective rally, for an entry closer to resistance.
Aggressive traders could short at will. Of course, they should have a trading plan that meets their timing, budget, and risk aversion. Here's a basic example:
Trade Sample – Aggressive Short Position
- Entry: 1.1100
- Stop-Loss: 1.1150
- Risk: 50 pips
- Target: 1.0950
- Reward: 150 pips
- Risk-Reward Ratio: 1:3
Author's Note: The above is just a sample, meaning it isn't the only way to approach this trade. Timing, personal budget, and trading style will determine the correct way to address this trade. Until you learn how to develop a suitable strategy, use our sample for learning purposes, but don't necessarily expect to profit. That will only happen once you understand how to do this on your own. Otherwise, you'll neither learn nor profit. Guaranteed. And there's no money back.
