Euro against US dollar on downward trend

FROM the onset of 2018, the euro against US dollar (EURUSD) has begun on a steady descend, forming lower highs and lower lows as it makes its approach towards the lows of 2015/16 due to the strengthening of the US dollar across this period. Amid the increased volatility across the currency markets in March 2020, resulting from the escalation of the Covid-19 pandemic, EURUSD broke out to a new high of 1.1495, signalling a potential end of the down trend. However, prices swiftly reversed and formed a new low within a span of two weeks. Since then, prices have been caught within a narrow range, although various indications reveal a likely continuation in the macro down trend.

The first indication shows that prices are residing below the 200-day exponential moving average (200EMA) on the daily time frame. Typically, the 200EMA serves as a strong support/resistance level relative to the position of price above or below it respectively. This is further strengthened by coinciding with the resistance on the horizontal plane, where previous encounters at the same level was rejected lower. The second indication is the formation of a rectangle pattern which is identified as a continuation pattern of the overall trend, that occurs via a trading range bounded by parallel support and resistance.

In addition, the stochastics oscillator is currently revealing an overbought condition. In this case, the indicator seems to work extremely well in identifying possible points of reversal. In the two prior encounters, where EURUSD reverted lower from the same level, an overbought condition was also present. The stochastic oscillator is a directional indicator as well as a measure of momentum. A reading above 80 signifies an overbought condition while a reading below 20 represents an oversold condition. This further validates the potential move lower.