The euro extended its losses against the US dollar on Wednesday as the greenback gathered strength across the board. EUR/USD lost 0.6% to 1.0670, an important technical level that has acted as a solid support on several occasions over the past few weeks.
While the medium-term outlook remains positive after a strong rally since September last year, there are some ominous signs emerging from a technical standpoint. The recent development of a double top pattern on the four-hour chart is a cause for concern.
The double top formation is a bearish signal that points to a weakening buying pressure after a powerful uptrend. This pattern, which looks like the capital letter “M”, is formed by two peaks of similar height, separated by a trough viewed as support (neckline).
The bearish setup is confirmed once prices breach the neckline, particularly if the move is accompanied by a surge in trading volume. This suggests that more sellers are entering the market to bet against the underlying asset. For EUR/USD, neckline support is found in the 1.0670/1.0655 range.
In the next few sessions, traders should watch closely how the currency pair reacts around current levels. If 1.0670/1.0655 is broken on the downside, EUR/USD could slide towards the psychological 1.0500 level, which is a target obtained by projecting the height of the double top from the breakdown point.
On the other hand, if the bulls manage to defend support and push the pair higher, EUR/USD could retest the two recent peaks hovering just below the 1.0800 handle. If the pair gains further strength, there could be room for a run towards 1.0875.
EUR/USD Technical Analysis
The euro has been in a steady uptrend against the US dollar since September last year, but the recent emergence of a double top pattern is casting doubts over the currency pair’s outlook.
The first peak of the pattern was formed on January 6, when EUR/USD hit a high of 1.2350. The second peak was reached on February 25, at a level of 1.2243. The intermediate trough that separates the two peaks is located at the neckline, which is around the 1.0670/1.0655 range.
The neckline is a critical support level that has been tested several times in the past few weeks. If it is breached decisively, it could trigger a sharp selloff in the currency pair. Traders should keep a close eye on the trading volume as it could signal the strength of the bearish momentum.
A break below the neckline could send EUR/USD towards the 1.0500 level, which is a major psychological support. This level also coincides with the 38.2% Fibonacci retracement of the currency pair’s rally from September last year to the recent peak.
On the other hand, if the bulls manage to defend the neckline, EUR/USD could retest the recent peaks around the 1.0800 handle. A break above this level could open the door for a rally towards 1.0875, which is the 50% Fibonacci retracement.
Conclusion
EUR/USD is facing technical headwinds as a double top pattern emerges on the four-hour chart. The neckline support at 1.0670/1.0655 is a critical level that could determine the direction of the currency pair in the coming sessions.
