EUR/USD nears narrowing end of rising wedge

THE most traded currency pairs in the world are "the Majors" and EURUSD leads the group as the currency pair represents two of the world's largest economies. In March 2020, the pair staged a reversal after a long descending trend since 2018. After the bottom level around 1.0675 was hit, a rising wedge pattern that extends till date was formed.

The pattern can be identified by its narrowing trading range across a period of time, where the pattern opens wide in the beginning at the bottom and contracts as prices move higher. The rising wedge is a bearish pattern and may signal a reversal in prices.

Within the largest formation, we can spot a micro ascending channel between December 2020 till early January 2021. The channel spanned a width of approximately 135 pips. The ascending channel could be identified by its higher highs and higher lows in the price pattern. An upper channel line is constructed by connecting highs while the lower trend line connects the lows. Within the ascending channel, the parallel upper and lower trend lines show the area of support and resistance.

On Jan 8, 2021, a breakdown below the channel indicated change to a bearish trend. Since then, the pair has been above the support level around 1.2075.

It is worth noting that the break of the ascending channel was indicated by two signals. Firstly, the highest point in the channel which was the reversal point, hit the upper channel line of the major rising wedge pattern before descending to break the channel.

Secondly, there was a bearish divergence between the relative strength index (RSI) and the price. RSI is a tool to indicate momentum to measure the magnitude of recent price changes to evaluate overbought or oversold conditions. A bearish divergence occurred when EURUSD was making higher highs within the ascending channel, while the RSI was making lower highs. That was an indication that could suggest the waning of the upward momentum.

In a shorter term, we could see the pair testing the resistance level around 1.2148. However, in a longer time horizon, we hold the view that the EURUSD will test the support line of the bottom of the rising wedge around 1.2025.

If broken, the pair may be headed to the previous support level around 1.1624 (S2). The EURUSD tested this resistance line twice in September and November 2020 but failed and continued on a bullish trend.

Given the scenario when the support line 2 (S2) is broken, it may encounter the bottom at 1.0675 where the pair had last seen in March 2020.

• The writer is strategist at Phillip Futures.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.

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