EUR/USD Price Analysis: Bulls could be running into a trap

• EUR/USD bearish W-formation remains is in focus in the build-up to US CPI.
• Bulls could find themselves trapped in trying to break out through recent highs.

EUR/USD is extending the bullish rally on Tuesday and has been trying to print a fresh high for this week’s initial balance, taking the US Dollar down to 1.0759 vs. the Single Currency on the bull’s quest for a test towards 1.0800.

However, as illustrated at the start of the week’s technical analysis, EUR/USD Price Analysis: Breakout traders triggered long, bears looking to pounce, we have red news on the calendar on Thursday that marries up with a technically bearish fo5rmation on the charts as the following will illustrate. Bulls could be running into a trap and as analysts at Brown Brothers Harriman explained, who continue to believe markets are underestimating the Fed; ”it’s hard to reconcile a risk rally with deep US yield curve inversion.”

EUR/USD technical analysis

In the prior analysis, it was explained that EUR/USD rallied towards a key resistance area but has started to slow in its ascent which leaves the focus on signs of distribution for the days ahead. 

EUR/USD had reached up to test prior highs of 1.0736 and has moved into a critical resistance area as a potential last stop before the bears move back in. We have seen a bullish open for Tuesday but are yet to see a fresh high. Nevertheless, there is still time until Thursday’s red news in the United States Consumer Price Index which leaves scope for a push towards 1.0800, although lacking a significant catalyst, this could be a tall order. 

Zoomed in…

(Monday above, Tuesday, so far, below)

If the bears emerge below 1.0790, then the focus will be on signs of distribution again that will ultimately trap the breakout long positions.

The W-formation is supportive of such a thesis given that it is a reversion pattern. EUR/USD would be expected to revert towards the neckline and prior day’s lows of near 1.0637. This could put the trendline support back under pressure and open the risk of a move below 1.0500 and on to test 1.0480, 0.0440 and then 1.0300 that guards 1.0290 and 1.0225 lower down. 

In the meantime, bears will be on the lookout for the phenomenon of a sweep of the relatively equal highs towards, say, 1.0800, failures and a break of structure to the downside to change the character from bullish to bearish in the schematic. The lower time frames can be monitored for signs of buying exhaustion over the coming sessions. A long squeeze below 1.0750/36 could then be in order with US Consumer Price Index eyed as a potential catalyst on Thursday for this three-day set-up and potential bearish opportunity.