Chart Of The Day: Euro Set For Another Dramatic Decline

After losing more than 3.5% of value during which the EUR/USD dropped 11 times within 14 sessions, the euro now appears to have found its footing. There are two fundamental drivers for the single currency's descent—interest rate differentials between the eurozone and the US and ongoing Russian aggression in Ukraine.

If those catalysts sound familiar in relation to the euro, that's correct. For nine consecutive months, from July 2014 to March 2015, the EUR/USD pair lost nearly 22% because of the same drivers, after Russia invaded, then annexed the Crimean Peninsula from Ukraine, while at the same time the US Federal Reserve was more hawkish than the European Central Bank, forming then, as now, divergent monetary policies favorable to the USD.

Technicals provide additional negative signals for the EUR/USD.

EUR/USD Monthly 2014-2022

The euro has penetrated the neckline of an H&S Continuation pattern in place since 2015. If the price flips the trendline's support to resistance, it will create the impetus for a continued decline toward 0.9000.

The broader view is even gloomier:

EUR/USD Monthly 2000-2022

Via the longer timeframe, we can determine that the H&S since 2015 is actually part of an extended downtrend framed within a Falling Channel that's been set up by an even larger H&S, formed between December 2004 and January 2015. The current H&S found resistance by the neckline of the preceding, larger version of the pattern, reinforced by the 200-Month MA.

The 50 MMA fell below the 200 MMA in late 2016, triggering a monthly Death Cross for the first time since 2000. Then, the euro proceeded to drop another 26%.

We are currently less than 12% above the recent monthly Death Cross. The crossing occurred while the 200 MMA was still rising, deflating some bearish implications. However, the 200 MMA peaked in 2019 and has been curving downward ever since.

Meanwhile, the 100 DMA crossed below the 200 MMA in mid-2018. And finally, the 50 MMA, which pushed higher along with the 2020 euro ascent, has curved below the 100 MMA, signaling the resistance of the more extended pricing indicator, which is bearish.

This past February, the 50-Week MA crossed the 100 WMA, zeroing in on the 200-Week MA for a weekly Death Cross. The last time this happened was in 2019, after which the single currency slipped another 6% in the following six months.

However, that cross occurred against a flat 200 WMA. Right now, that indicator is in decline, making such a cross much more potent.

For the final, broadest view of the pair, we include a chart that dates back to 1985. Note that the euro launched on Jan. 1, 1999, so the years before that are represented by a basket of currencies in use by the countries that joined the EMU in order to create the euro—pre-euro proxies vs the dollar if you will:

EUR/USD (including pre-1999 proxies) Monthly, 1985-2022

The EUR/USD's current H&S is winding up the spring, in order for the price to test the bottom of a rising channel since the 1985 low. The continuation pattern implies a 0.97 target.

Should that be realized, the price will have broken the rising channel. Given its longevity, the outcome could be dramatic, sending the price to test the 2000 lows above 0.8.

Trading Strategies

Conservative traders should wait for the price to fall below the March 2020 low on a closing basis, without climbing back above the neckline for at least three months. They would wait for a return move to successfully retest the previous support of the neckline and demonstrate its new resistance.

Moderate traders would also wait for a decline below the 2020 low but without it climbing back above the neckline for even two months. They, too, would wait for a corrective rally for a better entry, if not further confirmation.

Aggressive traders could be short now, provided they operate according to a trading plan whose risk is acceptable to them. Here is a basic example:

Trade Sample – Aggressive Short Position

• Entry: 1.1000
• Stop-Loss: 1.1025
• Risk: 25 pips
• Target: 1.0700
• Reward: 300 pips
• Risk-Reward Ratio: 1:12