Bearish Chart Pattern Developments Still Favor Further Downside In EUR/USD

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 |  Includes: ERO, EU, EUO, FXE
by: FXstreet

The EUR/USD traded in a narrow range today, closing up five pips at $1.2933. The muted price action wasn't surprising given the fact both the U.K. and U.S. markets were closed for holiday on Monday. However, although the EUR/USD price action was fairly quiet, some analysts believe it is worth noting there was some impressive action in the European stock and bond markets during the previous session. Although the correlation between the EUR/USD and risk assets hasn't been as high as previously, it's still worth noting as New York and London are set to re-open today (Tuesday).

According to analysts at Rabobank,

investors turned positive in Europe on Monday, pushing the Estoxx 50 up 1.1% to close at 2,795. The same positive tone was evident in bond markets with yields on Italian and Spanish debt falling about 8 bps. The yield on Italy's 10Y closed at 4.04% and on Spanish at 4.31%. It's now over eight months since the yield on 10Y Spanish debt fell through 6.0% in September 2012 and despite a range of challenges impacting the eurozone from uncertain Italian elections to the Cyprus 'incident', both earlier this year, the yield has not gone above 6.0% since.

Given the recent headline driven trading rumors due to comments from central bank officials, some analysts were quick to point out remarks made by an ECB official which hit the wires earlier in the day. Although the comments did not have a major effect on the pair, it may be a sign of further developments to come later in the week.

According to Marc Chandler, Head of Currency Strategy at BBH,

markets also focused on comments by ECB board member Asmussen about further easing. His comment that the bank is having "an open discussion" about cutting the deposit rate fanned hopes of further easing. However, he was sure to position himself as belonging to the camp that is "less open" to further action. Discussions of negative deposit rates by the ECB, like those of early tapering of QE by the Fed, represent a minority view in their respective central banks. In both cases, we think some observers may be getting too sanguine about the prospect of action in the near therm. Still, it leaves the balance risks unequivocally favoring the dollar against the euro.

Due to the lack of economic data in the previous sessions, some analysts were looking to the order flows for hints at any major moves the pairs may having in the upcoming sessions. According to Sean lee of FXWW,

EUR/USD is stuck in neutral, with bullish moves in the crosses being outweighed to some degree by an overall USD-positive sentiment. Sovereign interest is reported both sides of $1.2800/$1.3000 and further range trading looks highly likely.

From a chart pattern perspective, it appears there is a possible 'bear flag' continuation pattern forming on the EUR/USD daily chart which has targets down near $1.25820. The pattern would be confirmed with a break and close below $1.2880. Furthermore, this 'bear flag' pattern is likely part of a larger head & shoulders top pattern which can be more easily seen by zooming out to the weekly time frame. The h&s top has a neckline support level which sits at $1.2770. A weekly close below this level would be needed to confirm the pattern which has targets all the way down near $1.1870

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.